What to expect when using a business broker to sell your business

Most business owners use the services of a business broker because they do not have the time or knowledge to market the business properly. The key is to search out the successful business brokers and ignore the rest. Seek out a broker who is familiar with your area of business. Investigate the brokers reputation in the marketplace before you deal with them.

A business broker will usually require the exclusive right to sell the business for a period of six months or more. In addition to selling the business, the broker will also perform some tangible services, such as preparing a presentation package for prospective buyers and a valuation report. Typically, business brokers charge a fee based on a percentage of the purchase price, although they may also require a retainer in addition to the success fee. In almost all situations, the seller pays the brokers fees. Fees for the sale of companies selling for less than $1 million typically range from 8% – 12%, with some minimum amount of commission provided. For sales in excess of $1 million a sliding scale based on the Lehman formula – or some similar formula – is often used with the commission rate dropping for each incremental $1 million in price. The sliding scale used in the Lehman formula is:

  • 5% of the first $1 million
  • 4% of the second $1 million
  • 3% of the third $1 million
  • 2% of the fourth $1 million
  • 1% of the fifth million and over

Services provided by an experienced broker can include:

1. A business valuation. A business valuation may be provided by the business broker or by a professional specializing in business valuation (for example accountant or business appraiser).

2. A marketing package. A marketing package or confidential business offering should be created that will best display your business to prospective buyers. The seller should always review and approve the presentation before it is distributed.

3. Confidentiality / Non disclosure Agreement. All prospective buyers must sign a confidentiality / non disclosure agreement. A broker can provide such an agreement and have every prospect execute it at the appropriate time.

4. Screening prospective buyers. Screening and qualification is required to make sure that only those individuals or companies with the requisite skills and financial ability to purchase are shown your company. This will save you a lot of time, as you will only be dealing with qualified prospects. As brokers are a third party to the transaction, it is often easier for them to ask the prospect the necessary qualifying questions than it is for the seller.

5. Negotiating the sale. The broker normally conducts the negotiations on behalf of the seller, although it is possible for the seller to be personally involved in the negotiations. A good broker understands the art of negotiation and can be a valuable asset in this stage of the sale. It is important that the respective roles of the seller and the broker are clearly defined in the negotiation process.

6. Generating leads. The broker is responsible for generating leads for prospective buyers. A good business broker invests as much time cultivating a stable of prospects as trying to sell a business. Consequently, the broker may already have prospects that fit your buyer profile. A broker will also advertise the business in newspapers or trade publications at their expense.