What Is a Business Broker?
A business broker is an individual or company that assists in the purchase and sale of small, main street businesses. These agents can take on a variety of tasks to help their clients achieve their acquisition and offloading objectives, and might specialize in companies belonging to certain industries or possessing specific, unique characteristics.
- A business broker is an individual or company that assists mainly in the purchase and sale of small, main street businesses.
- Their tasks include helping companies to secure a favorable price, submit paperwork correctly and fulfill any licensing and permitting requirements.
- Business brokers are paid through commissions based on a percentage of the proceeds realized from the transactions they help to arrange and oversee.
- Regulation of business brokers varies by state, with some jurisdictions requiring licenses and others not.
Understanding a Business Broker
Transferring ownership of a company is a complex process. Among the various challenges that must be overcome include determining a fair valuation, making sure the company's finances and accounting records are in order, negotiating a price, going through escrow and closing the sale.
Business brokers not only manage these steps but also ensure confidentiality by requiring interested buyers to agree not to disclose the details of the potential business sale. Business brokers, which may work independently or as part of a larger brokerage firm, can also help with licensing and permitting requirements and weed out unqualified suitors.
Business valuations, marketing, prospect interviews, negotiation, and due diligence are just some of the critical tasks that business brokers handle.
Those wishing to buy or sell a company can locate business brokers through attorneys, accountants, and professional associations, such as the International Business Brokers Association (IBBA).
Advantages and Disadvantages of a Business Broker
Business brokers deliver many benefits. Executing company purchases and sales is a complex undertaking that can cause many headaches and sleepless nights. Business brokers have specialized knowledge of the tax and legal implications involved in these transactions, helping to save on costs and reduce the risk of potentially crippling issues surfacing later on down the line.
Outsourcing this complicated legwork to professionals should ensure that a satisfactory deal is concluded seamlessly. It adds value, too, enabling the business owners to continue to focus all their energies on day-to-day operations without getting distracted and bogged down with other dilemmas.
Companies also hire business brokers to pinpoint suitable companies to purchase or to increase the likelihood of selling. In both cases, the expertise and contacts of business brokers should hopefully ensure a smooth transition and a favorable price being received or paid. Business brokers have relationships with people seeking to buy businesses as well as those seeking to sell. They also know how to market a company for sale and often will be able to identify serious buyers with sufficient financial resources from those who are just bluffing.
These services don’t come cheaply, though. Business brokers are paid through commissions based on a percentage, typically upwards of 5 percent, of the sale price they secure for the company. For some companies, that may represent money well spent. Others, meanwhile, might prefer to trim down these costs, perhaps by hiring a broker to just handle the final negotiation phase.
Business Brokers vs. M&A Advisors
Like business brokers, M&A Advisors guide businesses through the complicated world of mergers and acquisitions (M&A). Where they tend to differ is in size.
M&A advisors are often investment bankers that work on a national or even global scale, handling complex deals and sales spanning multiple locations. By contrast, business brokers typically specialize in smaller, main street companies. These businesses are usually valued below $2 million and in many cases, are owned by individuals or families who work there full-time.
Picking the Best Business Broker
Choosing a decent business broker requires a bit of effort. Many of them will be good at their job, though, as is the case in any profession, some will be better than others.
A smart place to start is by looking at the percentage of businesses they’ve sold out of all the businesses they’ve tried to sell. After assessing track records, it’s worth picking one with relevant expertise in the same field as the company in question.
Beware, though, that business brokers in some states aren’t regulated. A few states even permit the same broker to represent both the buyer and the seller in a transaction. Dual agents, as they are known, are often required to follow certain rules, yet that, perhaps understandably, does not completely eliminate concerns over potential conflicts of interest.
For extra peace of mind, it generally pays to seek out business brokers that voluntarily belong to associations committed to upholding ethical standards of conduct and professionalism, such as the IBBA or other trade organizations. Some may even be accredited as a Certified Business Intermediary (CBI), an extra badge of honor that, among other things, proves that they have undergone extensive training.