ⓘ Business broker

Business broker

ⓘ Business broker

Business brokers, also called business transfer agents, or intermediaries, assist buyers and sellers of privately held businesses in the buying and selling process. They typically estimate the value of the business; advertise it for sale with or without disclosing its identity; handle the initial potential buyer interviews, discussions, and negotiations with prospective buyers; facilitate the progress of the due diligence investigation and generally assist with the business sale.

Agency relationships in business ownership transactions involve the representation by a business broker on behalf of a brokerage company of the selling principal, whether that person is a buyer or a seller. The principal broker and his/her agents then become the agent/s of the principal, who is the brokers client. The other party in the transaction, who does not have an agency relationship with the broker, is the brokers customer.


1. Agency relationships with clients and customers

Traditionally, the broker provides a conventional full-service, commission-based brokerage relationship under a signed agreement with a seller or "buyer representation" agreement with a buyer. In most states this creates, under common law, an agency relationship with fiduciary obligations. Some states also have statutes which define and control the nature of the representation and have specific business broker licensing requirements.

Agency relationships in business ownership transactions involve the representation by a business broker on behalf of a brokerage firm of the selling principal, whether that person is a buyer or a seller. The principal broker and his/her agents then become the agent/s of the principal, who is the broker’s client. The other party in the transaction, who does not have an agency relationship with the broker, is the brokers customer.


1.1. Agency relationships with clients and customers Transactions brokers

In some U.S. states, business brokers act as transaction brokers. A transaction broker represents neither party as an agent, but works to facilitate the transaction and deals with both parties on the same level of trust. In the UK, it is generally only business brokers specialised in the sale of accountancy practices who operate as transaction brokers. A transaction broker typically gets paid by both the buyer and the seller.


1.2. Agency relationships with clients and customers Dual or limited agency

Dual agency occurs when the same brokerage represents both the seller and the buyer under written agreements. Individual state laws vary and interpret dual agency rather differently.

  • Some states do allow a broker and one agent to represent both sides of the transaction as dual agents. In those situations, conflict of interest is more likely to occur.
  • If state law allows for the same agent to represent both the buyer and the seller in a single transaction, the brokerage/agent is typically considered to be a dual agent. Special laws and rules often apply to dual agents, especially in negotiating price.
  • In some U.S. states notably Maryland, Dual agency can be practiced in situations where the same brokerage but not agent represent both the buyer and the seller. If one agent from the brokerage has a business listed and another agent from that brokerage has a buyer-brokerage agreement with a buyer who wishes to buy the listed business, dual agency occurs by allowing each agent to be designated as" intra-company” agent. Only the principal broker himself/herself is the dual agent.


2. Types of services that a business broker can provide

Broker services vary widely depending on the practice and skill set of the broker. The most common services provided by a broker to a client are:

  • Help maintain confidentiality of the sale.
  • Provide overall deal management to guide the client through the entire process.
  • Assist client in establishing a MPSP Value - Most Probable Selling Price Valuation; the techniques used by individual brokers can vary greatly in this process.
  • Conduct buyer searches.
  • Coordinate negotiations and provide deal structuring advice.
  • Screen buyers for ability to complete a purchase.
  • Develop a comprehensive Information Memorandum on the company; normally a 15-30 page document outlining the business for potential buyers.
  • Provide acquisition and deal sourcing services to acquirers and investors.
  • Hourly consulting for a fee, based on the clients needs.
  • Exposure - Marketing the business to prospective buyers.
  • Analyze a companys tax returns for up to 3 years and prepare an adjusted cash flow statement for buyers to review. Business brokers commonly use Sellers Discretionary Earnings "SDE" and not EBITDA calculations.

Perhaps one of the biggest services provided by brokers is the ability to allow owners to stay focused on running their business during the sale process, which can take on average 6 months to 12 months to complete.


3. General

The sellers and buyers themselves are the principals in the sale, and business brokers and the principal brokers agents are their agents as defined in the law. However, although a business broker commonly does work such as creation of an information memorandum for a seller or completing the offer to purchase form on behalf of a buyer, agents are typically not given power of attorney to sign closing documents; the principals sign these documents. The respective business brokers may include their brokerages on the contract as the agents for each principal.

The use of a business broker is not a requirement for the sale or conveyance of a business for obtaining a small business or SBA loan from a lender. However, once a broker is used, a special escrow attorney sometimes called a settlement attorney very similar to a Real Estate Closing in practice will ensure that all parties involved get paid. Lenders typically have special requirements for a business related or SBA loan.

The market served by business brokers generally involves businesses with transaction values less than $10.000.000. Larger privately held companies are classified as middle market firms and typically employ firms that specialize in mergers and acquisitions M&A. However, business brokers do participate in mergers and acquisitions activities when it involves a transaction between two or more smaller companies. Business brokers and M&A firms do overlap activities in the extremes of their market. These extremes are called the transitional market, or transmarket.


4.1. Business brokers and sellers Services provided to seller as client

Upon signing a listing contract with the seller wishing to sell the business, the brokerage attempts to earn a commission by finding a buyer for the sellers business for the highest possible price on the best terms for the seller. To help accomplish this goal of finding buyers, a business brokerage commonly does the following:

  • Advertising the business. Advertising is often the biggest outside expense in listing a business.
  • In some cases, holding an earnest payment in escrow from the buyers until the closing. In many states, the closing is the meeting between the buyer and seller where the business ownership is transferred and the businesses name is conveyed.
  • Negotiating price on behalf of the sellers. The sellers agent acts as a fiduciary for the seller. By not being emotionally tied to the transaction, business brokers are in a position to more effectively negotiate on a sellers behalf. This may involve preparing a standard offer to purchase contract by filling in the blanks in the contract form.
  • Ensures confidentiality - Brokers have established systems in place to protect the confidentiality of a business.
  • Negotiating facility lease assignment or transfer, negotiating with creditors, assisting buyers in obtaining financing.
  • Appraisals - Most business owners have no idea what their business is worth. Business valuation is complicated. Most experienced business brokers have at least some formal training in business appraisal and can help business owners understand the market value of their business, at least enough to establish an asking price.
  • Saves time and stress
  • Listing the business for sale to the public, most often on at least one of the major businesses-for-sale websites, in addition to any other methods.
  • Market knowledge - Brokers make their living selling businesses. They are in the market on a daily basis conversing with buyers. A local business broker usually understands the local market as well as what a business is worth.
  • Preparing necessary papers describing the business for advertising, pamphlets, tours, etc.
  • Ensuring buyers are prescreened so that they are financially qualified to buy the business; the more highly financially qualified the buyer is, the more likely the closing will succeed.
  • Being a contact person available to answer any questions about the business and to schedule showing appointments
  • Based on the law in several states, providing the seller with a business condition disclosure form, and other forms which may be needed.

Business brokers attract prospective buyers in a variety of ways, including listing limited details of available businesses on their websites and advertising on the larger business-for-sale websites. Only in rare cases today does this extend to print media advertising. Brokers also directly approach prospective buyers and sellers to gauge interest. Most established business brokers have a large pool of prescreened buyer prospects - or know of other business owners - who have looked at other opportunities through the broker, but who are still actively searching to buy a business.


4.2. Business brokers and sellers "Listing" contract

Although there can be other ways of doing business, a business brokerage usually earns its commission after the business broker and a seller enter into a listing contract and fulfill agreed-upon terms specified within that contract. The sellers business is then listed for sale, often on one or more business-for-sale websites, in addition to any other ways of advertising or promoting the sale of the business.

In most of North America, a listing agreement or contract between broker and seller must include the following:

  • Amount of compensation due to the broker
  • Starting and ending dates of the agreement

5. Brokerage compensation

There are three forms of brokers compensation: hourly, retainer, and success fee commission upon a closing. A broker may use any one, or combination of these when providing services. Some charge on reaching certain milestones such as creation of the Information Memorandum or signing of Heads of Terms.

The most common form of compensation is a success fee commission where the payment of a commission to the brokerage is contingent upon finding a satisfactory buyer for the business for sale, the successful negotiation of a purchase contract between a satisfactory buyer and seller, or the settlement of the transaction and the exchange of money between buyer and seller. Just as major investment banks normally charge a retainer for services, more business brokers have started to embrace this practice as well. The retainer helps cover the upfront costs incurred by the broker to perform services and shows a commitment on the part of the client seller or buyer that they are serious. Certain types of M&A transactions involve securities and may require that an intermediary be securities licensed in order to be compensated.

In North America, success fee commissions range from 5% to 12%. Usually, the smaller the transaction, the larger the commission. "Main Street" businesses, those with enterprise value between $100.000 and $5.000.000 can expect commissions to average between 10-12%.

Retainers, when charged, run from a low of a few hundred dollars to six figure sums depending on the size and complexity of the transaction. They are usually non-refundable, but are sometimes deductible from the commission paid at closing. Commissions are determined between the client seller or buyer are normally paid at closing. The larger middle market transactions use the Lehman or the Double Lehman scales.

In the UK, many brokers handling the sale of smaller businesses often operate on a no retainer basis and with their entire compensation being paid only on successful sale of the business. Others charge a small retainer ranging from a few hundred pounds to a few thousand. Larger businesses may pay several tens of thousands in retainers followed by a success fee ranging from 1% to 5%. Commissions are negotiable between seller and broker.

Brokers typically foot the cost of marketing and other expenses incurred in their attempts to sell the business.


6. Licensing of business brokers

In the US, licensing of business brokers varies by state, with some states requiring licenses, some not; and some requiring licenses if the broker is commissioned but not requiring a license if the broker works on an hourly fee basis. State rules also vary about recognizing licensees across state lines, especially for interstate types of businesses like national franchises. Some states, like California, require either a broker license or law license to even advise a business owner on issues of sale, terms of sale, or introduction of a buyer to a seller for a fee. All Canadian provinces with the exception of Alberta, require a real estate license in order to commence a career. According to an IBBA convention seminar in 2000, at least 13 states required business brokers to have a real estate license. The following states require a license to practice as a business broker: Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois registration only, Minnesota, Nebraska, Nevada, Oregon only if real estate transfer is part of the transaction, Rhode Island, South Dakota, Utah, Wisconsin, and Wyoming.

In the UK there is no licensing system in place and no formal requirements for practising as a business broker.

Certain types of M&A transactions involve securities and may require that these "middlemen" be securities licensed in order to be compensated. The governing authority in the US is the U.S. Securities and Exchange Commission and in the UK it is the Financial Conduct Authority.


7. Business Broker Associations

Business brokers have a number of National, Regional and local Associations in the United States that provide education, regulatory and annual conferences for its members. One of the largest is the IBBA which has over 500 business broker members across the United States. The IBBA also has a Canadian arm.

In the UK the national body is the Institute for Transaction Advisers and Business Brokers. In Australia the national body is the Australian Institute of Business Brokers.

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