How To Sell A Small Business Without A Broker – When the time comes to sell a small business, small business owners can hire a realtor to sell their business, just as a homeowner hires a realtor to sell a home.
Some small business owners choose to sell their business without the help of a business broker, which also has some advantages and some disadvantages.
How To Sell A Small Business Without A Broker
Some of the reasons small business owners decide it is time to sell are: health issues, no longer passionate about the business, new interests outside the business, the owner holding back on the business, the owner lacks a transition plan, the owner’s spouse says it is time to sell, owner needs to diversify and/or differences in partnership.
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If you find yourself in one of these positions, we have gone into more detail about the questions you can ask yourself in another blog called “Is it time to sell your business?”.
Investopedia provides a good overview of when it’s time to sell and how to plan for a successful outcome, starting with asking yourself why, given the timing of the sale, you’re getting a business valuation (consider using the Business Valuation Calculator for getting an estimate in just 5 minutes), brokerage considerations, preparing documents, finding a buyer and handling financial matters.
Once the decision to sell is made, the business owner must prepare the business for the sale process. At a basic level, this includes ensuring that accounts and operations are in order.
Want to know more about the details? The National Association of Independent Businesses provides a robust sales preparation checklist that focuses on pre-selection of a buyer and preparing an exit strategy in advance.
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Over the past two decades, we have developed a simple framework for determining whether a business is ready for a successful sale.
The Five Success Criteria is a basic assessment that any small business owner can complete before selling a small business. A more comprehensive assessment of the business may also be appropriate if the owner seeks to maximize the proceeds from the sale.
Another important decision to make when selling a small business is whether or not to hire a business broker.
A business broker is someone who assists in the sale of small (typically $5 million or less in revenue) or high street businesses (eg dry cleaners, convenience stores, etc.).
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Many are affiliated with a larger corporate brokerage firm (similar to a real estate agent affiliated with a large brokerage such as Re/Max or Keller Williams), although some are independent. Licensing requirements for business brokers vary widely from state to state.
Brokers are not to be confused with investment bankers who provide a wide range of advice on capital raising, mergers and acquisitions and other more comprehensive capital markets services to larger companies.
The decision of whether to hire a business broker to help with the sale of a small business depends largely on the circumstances facing the owner.
We believe that hiring an experienced and skilled broker tends to be a better option for most business owners than not. Small business owners are experts in running their business – they are not experts in understanding how to successfully sell a business.
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Commercial brokers provide guidance to avoid common pitfalls in an often complex process: preparing the business for sale, marketing the business to potential buyers, performing due diligence, negotiating transactions, finalizing legal documents and closing the sale is a complex process with many potential pitfalls. Having a solid guide in this process will benefit most small business owners.
Brokers maintain a network of potential buyers for a small business and provide access and market the business to that network. Access to a larger pool of interested buyers is critical to identifying potential matches and creating a competitive process that ensures a successful seller outcome.
The best brokers will have a track record of successful transaction experience (supported by references from buyers and sellers), experience in or knowledge of the industry your business operates in, and the ability to provide a tight and precise timeline for completing the transaction.
Identifying and hiring a good business broker is no different than choosing another vendor – and small business owners tend to be experts in the vendor selection process.
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Maintaining a positive seller-buyer relationship is critical to getting the transaction across the finish line, especially if the seller wants to work with the buyer after the transaction closes. A commercial broker can often act as an intermediary between a buyer and a seller.
A successful sales process involves input from various experts in addition to the sales agent. Brokers will often organize a team of professionals, including experienced corporate lawyers, tax advisors and estate planners, among others, who will help complete the transaction and handle the complexities of pre- and post-closing transactions.
For example, brokers, business lawyers and tax advisors will often work together to ensure that the seller can minimize the taxes associated with the sale of the business.
The standard brokerage fee or commission is usually based on the Lehman Fee structure. The Lehman Fee Structure was developed by Lehman Brothers and is the most common fee structure in small business mergers and acquisitions. We wrote an additional blog post discussing Lehman’s fee structure, which you can read here.
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So to be clear, 10 million sales results in a $200,000 fee. See the recordings below:
Some brokers may charge a flat rate, such as 3%. In almost all cases, brokers will request an advance payment against a closing commission or commission to cover certain costs and expenses as well as to confirm the seller’s commitment to the sales process.
Hiring a broker requires the business owner to trust that the broker will run an orderly process that accurately communicates the business to the market. For some business owners, this loss of perceived control over the critical next phase of their business is very difficult to imagine.
Just like selling a home, a broker has an incentive to close a deal so they get a commission or commission. Business owners must be aware that this disparity in incentives exists and that a bad deal for the seller can be a good deal for the broker.
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As mentioned above, we believe that hiring an experienced and qualified broker is usually in the best interest of most small business owners looking to sell their business.
For anyone facing one of the above situations, here are some benefits to consider when selling without a broker.
Without the services of a merchant broker, the small business owner can avoid a merchant fee or commission as described above.
Many small business owners are used to having complete control over important decisions related to their business.
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Working with a business broker can be uncomfortable for some small business owners because it requires them to rely on a third party to effectively communicate with buyers about their business. Who knows my business better than me?
Just like selling a home, a broker has an incentive to close a deal so they get a commission. A bad deal for the seller can be a good deal for the broker.
Deciding not to work with a broker can remove concerns that the broker does not have the business owners’ best interests at heart and ensures that the seller has their best interests at heart.
A successful broker should be able to create a broad market for the business by identifying and communicating with many buyers.
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Without the support of a business broker, a small business owner can limit the number of potential buyers and thereby miss the opportunity to create a situation where multiple bidders compete to buy the business.
A successful sales process involves input from various experts in addition to the sales agent. Without a successful corporate broker’s Rolodex, a business owner will be required to assemble their own team of experts, including experienced corporate attorneys, tax advisors and estate planners, among others.
A good business broker will advise the seller on business valuation expectations, necessary terms of sale and other important market knowledge.
Selling a business without a broker will require the seller to develop this knowledge and invest time and effort in getting to know the market themselves.
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Maintaining a positive seller-buyer relationship is critical to getting the transaction across the finish line, especially if the seller wants to work with the buyer after the transaction closes. A business broker can often act as a “bad guy”/middle ground for buyer and seller.
Most small business owners will only sell their business once. They are not experts in the process.
Handling a sales process without a broker will require a significant investment of time by the business owner to search for potential buyers, prepare an overview of the business, discuss the opportunity with identified buyers, prepare due diligence documents, etc. and focusing on the sales process limits the time owners spend driving