Business Brokers Make Sure Your Price Is Right
By Jay MacDonald
Few things in life are as scary as selling your business.
For many, it's a once-in-a-lifetime experience, charged with an emotional attachment that may go back generations. And, in all likelihood, you've never played for these stakes before. It's sort of like being dealt your very first hand of blackjack in Las Vegas -- only with your whole life on the line.
That makes it an excellent time to get to know a business broker, a professional who is specially trained and experienced to represent your interests in the sale of your company.
It is entirely possible to sell your business yourself. You might even get lucky and receive top dollar for your life's work. But the odds of that happening are slim compared to the risks associated with being your own broker and taking that Vegas card deal without someone at your side who knows the game inside and out.
"You may have owned the business for 20 years, you're an expert at what you do, but you've never been through the selling process before," says Stephen Goldberg, owner of Sunbelt Business Brokers Network Inc. of New York and New Jersey. "The last thing you want to do is experience the learning curve on the biggest thing you'll ever sell."
A little knowledge upfront about how a business broker works can save you time, money and considerable stress when it finally comes time to cash out.
What is a business broker?
Business brokers date back to the 1700s in England, where they were known as "business transfer agents." In America, brokers first gained prominence in the South, where business licenses were known as "chance" licenses and business brokers came to be known as "chance" brokers. The profession spread nationwide after World War II.
The past 25 years has seen the proliferation of business broker franchises, networks and professional accreditation. The reason? Plenty of work: Today, 20 percent of the estimated 20 million American businesses are for sale at any given time.
There is, quite understandably, a great deal of confusion about what business brokers do, according to Peter King, president of VR Business Brokers of Fort Lauderdale, Fla. That's because for roughly half of the country, business brokers are governed by real estate laws, while in the other half they act as consultants. Depending on the laws of your state, a business broker may represent the seller, the buyer, both seller and buyer, or the transaction itself.
To further confuse things, commission structures differ. Real estate agents who act as business brokers typically charge 6 percent to 8 percent commission; business brokers 10 percent to 12 percent.
The difference is one of approach.
"In real estate, when you list your home with a Realtor, you want them to advertise it as much as possible -- signs on the lawn, ads in the newspaper, open houses," he says. "It's exactly the opposite when somebody tries to sell their business. You don't want your clients to know the business is for sale. You don't want your employees or your competitors to know. With a business brokerage, it's very confidential; you've got people's financial statements involved. If you go about it the wrong way, people start to lose key staff, start to lose clientele."
Ed Pendarvis, president and founder of the Sunbelt Business Brokers Network, says that in most cases, the seller typically ends up "carrying the paper," financing anywhere from 30 percent to 50 percent of a business purchase over several years, because banks shy away from financing business purchases. As a result, selling a business is actually the reverse of a real estate transaction.
"In real estate, if I was showing your house, I would ask you and your wife to leave. You and the buyers would meet for a one-hour happy talk at closing," he says. "In our business, the first thing I want our buyer and seller to do is meet each other, get to like and respect each other. Because they are both going to have a vested interest, not only in a successful closing, but in the success of this business for the next five to seven years. In real estate, closing ends the relationship. In our business, the closing begins the relationship."
What price is right?
Perhaps the primary reason to consider hiring a business broker is for their ability to arrive at an optimum market price for your business. Typically, business brokers use several different valuation methods based on company earnings, company assets and industry comparables -- what similar businesses in the same industry have sold for recently.
Arriving at a realistic price can be an arduous and stressful process. Most business owners have spent a lifetime working with their accountant to hide their earnings (within the limits of the law, of course) and thus minimize taxes. Most business brokers spend their initial weeks recasting a client's financials to present a far more enticing picture of cash flow to lure prospective buyers.
Key traits of
successful leaders
Covenants not to Compete
Shareholder Agreements
Employment Agreements
Putting a price tag on your practice
Physician Resources
Getting To Yes
"All of the financials in a small business are done basically to pay no taxes, they're not done to show how well the business is doing. That's very hard to translate to a buyer's understanding," says Pendarvis. "I try to get people to look at the top line on a business. The bottom line only tells me if you've got a good accountant or not."
The measure of a skilled broker is in the creativity of the deal. That's where seller financing comes in; not only is it often an economic necessity in the absence of bank financing, it can also be an emotional one, as well.
"The main thing that a business broker does is build an honest relationship between the buyer and the seller," says Pendarvis. "The seller is reluctant to finance it because how does he know this fellow is going to run this business successfully? The buyer is reluctant to take the seller's representation as gospel and put his life's savings into it.
One way you bridge that leap of faith is to get the buyer to focus on the business, not the financials, and meet the seller and become comfortable that he is representing the business fairly and honestly. Financially, the buyer is going to feel much more comfortable if the seller will finance 50 percent of the business."
Why not sell it myself?
If you've been your company's Grand Poobah since the Kennedy administration, you may be convinced you can sell your business just fine on your own. Perhaps your accountant can even arrive at a rough estimate of what it might fetch at market.
Bad idea, say the experts. For one thing, as the business owner, you can hardly maintain the anonymity and confidentiality necessary to keep the process under wraps until the ink dries. You'll also be too emotionally involved to negotiate effectively; you'll tend to think the company is worth more than the price that will ultimately be set by the marketplace. And you'll be entering a classic mismatch.
"If you do it yourself, you're not dealing on a level playing field," says Goldberg. "You're dealing with buyers who are traditionally fairly experienced, they may have done five or six acquisitions in the past, they've been through the process."
King says that a business broker will not only find and negotiate with potential buyers on the QT, but also protect you from tire-kickers. "We screen the buyers to make sure they have the financial wherewithal to buy the business," he says.
Bottom line, it just may not make financial sense to take on such a time-consuming task.
"You have to remember that your goal is to continue to operate your business and, while it's for sale, keep the revenue the same or growing," says King. "I can guarantee that based on the hours it takes over six months to sell a business, if you take that much time away from your business you will lose more in cash flow than you will ever pay in commission."