Do I Need a Business Broker to Sell my Company?
As business owners contemplate succession planning or retirement, a common question we receive from prospective sellers pertains to whether a broker is required for a sale process. Selling a business undoubtedly entails a significant amount of time and effort. This effort is allocated across phases, including preparing the business for sale, generating marketing materials, marketing the business to prospective acquirers, negotiating with acquirers, and closing.
Although selling a small business may seem like a daunting task, it's possible to successfully navigate the process without a broker. Whether a seller wants to avoid fees, which can run into the hundreds of thousands of dollars, or feels confident in their ability to manage the sale process, going solo is a viable option. Not only are cost savings an advantage, sellers may find that establishing an early and strong connection with an acquirer may result in the seller realizing an outcome that accomplishes their unique goals without risking that a broker brings forward low fit partners.
What is a Broker and How Much Does a Broker Cost?
Brokers are professional service providers who are compensated to run a sale process and to help business owners realize a favorable transaction outcome. Each seller will have a unique definition of a successful transaction and it’s incumbent upon the broker to understand this definition, then to ensure a sale process is designed to realize an outcome that suits the seller’s goals.
Brokers most commonly represent small businesses with less than $5 million in profit, although deal sizes vary greatly depending on the broker’s area of expertise and experience. Most brokers are compensated on a success fee basis, meaning the broker charges a fee ranging from 5% to 10% or more of the transaction value. Brokers may also charge an upfront retainer to cover the cost of time and material required to start the sale process. Depending on the size of the company for sale, the retainer may range from a few thousand dollars, to tens-of-thousands of dollars. Relative to brokers, lower middle-market investment bankers represent businesses up to the low hundreds of millions of value, and typically charge a non-refundable retainer and a success fee around 2% of the transaction value.
When Are Businesses Well Positioned To be Sold by Owner?
An owner who has previously completed a business sale is well positioned to understand the steps in the deal process. These owners may prefer to avoid fees for brokers and instead opt to run a deal process on their own. Owners with existing buyer relationships may also forgo broker involvement. One of the broker’s key value propositions is finding buyers, so the prospect of paying a 10% transaction fee may be difficult to accept if a seller has a buyer lined up. Although a seller may decline broker representation, legal and accounting advisors should be retained prior to a sale process and referenced throughout the sale process.
How to Approach Valuation and Buyers Without a Broker
Owners should have a clear understanding of the valuation they desire for the business. Valuation expectations may be informed by data from comparable companies, comparable transactions, or a discounted cash flow exercise.
Owners who elect to lead the sale process should also be comfortable positioning the business to prospective acquirers. For instance, discussing topics such as the history of the business, forward looking prospects, competition, operations, and employees will be central to a buyer forming an understanding of the company. Fortunately, business owners know their operations better than anyone, so the exercise of sharing details of the company is often second nature.
Forming an understanding of buyer types is also advisable. Depending on the seller’s transaction goals, some buyers may be better suited for a transaction than others.
Preparing Material for the Sale Process
Owners should be close to the preparation of material for the sale process, especially for material that communicates the historical, current or future positioning of the business. For businesses that have not retained a broker, the owner is a key player in leading the preparation of material used to market the business.
Selling a business does not always require preparing a lengthy confidential information memorandum (CIM), but should a CIM be desired as a marketing asset the owner should expect to be close to the CIM preparation process. A properly prepared CIM is a sizable undertaking, often taking many weeks to complete. In the event a CIM is not used, the business will provide various supporting documents, often internal diagrams, reports, research, financial statements, or other documents that help the acquirer develop an in-depth understanding of the business.
The Risks of Picking the Wrong Broker
Settling for the wrong broker can risk the success of a sale process. If an auction process goes sideways and buyer interest doesn’t result in acceptable indications of interest, a broker may end up putting a deal on the back-burner in favor of prioritizing higher probability deals in the broker’s pipeline. Although success fees create an incentive for brokers to favor high priced outcomes, they also create challenges when a deal goes cold. If a broker spends many months attempting to sell a business but struggles to find a buyer, the success fee will be low probability thereby creating little incentive for the broker to allocate time to the deal.
Another challenge for sellers relates to a disconnect between the owner’s and broker’s definition of a strong fit buyer. Most brokers will require prospective acquirers to sign an NDA that prohibits the buyer from talking to the seller without the broker facilitating the conversation. In some cases, sellers may feel as though they have limited control over the sale process, or may feel as though the process didn’t afford sufficient time to build relationships with acquirers.
Listing a Business Should Not be The Broker’s Sole Source of Value
Before hiring a broker, it’s important to undergo a thorough vetting process and to seek references from clients who have engaged the firm or broker in question. Due to smaller average deal size, brokers may take on many clients at once and become bandwidth constrained, limiting their ability to produce marketing material for the business and to run outreach to buyers.
A broker that simply posts a listing on a business marketplace creates little value for the seller. Always explore the full offering before retaining a broker, and speak with past clients. The last outcome an owner wants is to waste time and effort on poor representation, risking the success of the deal or putting the owner in a position to feel like they have to drive momentum for the deal process, then pay hundreds of thousands of dollars to a broker who did not materially impact the outcome of the transaction.
For Sale by Owner - A Viable Option for Sellers
Selling a small business without a broker is a viable option for business owners, especially those who have a buyer lined up or who desire to limit the fees associated with a transaction. By preparing the business for a sale process, connecting with buyers, and seeking professional legal and accounting guidance, sellers can navigate the complexities of the sale process independently. This independence can help sellers avoid the pitfalls of an unengaged broker and may lead to a more successful and satisfying transaction, ensuring that a business finds the right new owner and that the seller accomplishes a satisfactory succession outcome.
