Why Should I Work with a Business Broker to Sell My Business?
It’s not uncommon to see “For Sale by Owner” signs in front of homes. Maybe your friend, family member, or even you have sold a home without an agent. It is unusual, however, to find the same sign outside a business.Although bypassing an intermediary may sound nice, there a lot of reasons to sell your business through a broker in the DMV area.
You Only Have One Shot
Like most owners, you probably will only sell your business one time. That means you have one shot at converting a very illiquid asset into the cash that will fund your retirement or post-business life.
Your business may be the most valuable asset in your portfolio, so it is critical to get it right. In addition, most prospective buyers have experts on their side of the table so having a transaction advisor (investment banker or business broker) on your side levels the playing field.
They Have the Expertise
You have become the expert in your business, and you know the years and experience that took. Rather than put in the time and effort to become an expert in every field, you outsource to other professionals. For example, you may have hired CPAs to prepare your tax returns and an attorney to prepare and review important contracts and wills.
This scenario is no different. Brokers can become trusted experts with time, experience, and a consistent track record. And you wouldn’t want to trust anyone less than an expert to sell your business in the DMV area. This ensures you get the most out of your business when you go to sell, especially in a competitive market. By outsourcing, you can devote time to what we do best: running our companies.
You Still Need the Time to Focus on Running Your Company
Another reason that you would want to use a broker to sell your company: the process of selling a business is a lot like a roller coaster ride. Sure, there are a few thrills, but there are also some very scary plunges and hairpin turns.
Unlike a typical amusement park ride, however, this roller coaster can and generally does crash at least once on the way to closing. Even the most disciplined owners find it nearly impossible to manage the process while maintaining profits and growth.
A focus on maintaining profits and growth is important because buyers look for “upside” in a purchase. In other words, they look for companies that they believe will make more money under their ownership than yours. One of the signs of “upside” is an upward trajectory: Are sales, profits and margins increasing, flat or decreasing? Going it alone in the sale process diverts an owner’s attention from growing the business. In addition, owners who have never been through a sale vastly underestimate the number of hours that go into organizing documents for due diligence, negotiating every warranty and representation and defending a sale price.
Tell Your Employees, Vendors, and Customers About the Change at the Right Time
Let’s not forget the issue of confidentiality. With an intermediary, you decide when to let employees, vendors and customers know that you’re pursing a sale. Without it, as soon as that “For Sale By Owner” sign goes up, employees, vendors and customers see “On My Way Out” and start looking for greener pastures.
Finally, brokers provide a buffer between buyer and seller. Buyers and/or their representatives will do everything they can to reduce the purchase price. It’s their job. That’s difficult for most of us to remember when buyers are picking apart every aspect of the business you have devoted your lives to. Skilled brokers know the games buyers play and can distinguish between legitimate questions (and numerous requests for clarification) and challenges to our credibility.
Hiring A Business Broker
Transaction intermediaries (brokers and investment bankers) come in several varieties and work in different market segments. The specific characteristics that you want in a business broker depend on the value of your company and the level of service you want and are willing to pay for. Beyond that, we offer these 5 tips for picking the “right” broker to sell your business in the DMV area.
1. Talk to your advisors.
We can’t overemphasize this point enough. Before you do a Google search, sign up for a “free consultation” or “no-obligation valuation” or respond to a cold call, talk to the advisors you trust! Your attorney, accountant, financial and/or exit planner have likely had experiences with transaction intermediaries through other clients. If they can’t recommend a specific broker to use, they can generally tell you which ones to avoid.
2. Don’t sign anything before talking with a trusted advisor.
In engaging any transaction advisor, you will sign an engagement agreement. Terms vary, of course, but let’s say that you agree to a one-year term. In addition to that 12-month term is a “tail:” the period during which the intermediary will receive a fee should you sell to any party that it contacted during the one-year term. Tails can last years and some do not define “contact.” Is a contact an email blast to a specific address or an expression of interest? Worse, some engagement agreements don’t require the intermediary to provide you a list of contacts.
One of our clients (“Joy”) signed a “one-year” contract only to find that the tail was three years. The second broker who Joy interviewed asked her to get a list of parties contacted from the first broker before he would represent her. The first broker refused to provide Joy the list because he was not contractually obligated to do so. Without a list, no broker would take Joy on as a client until the expiration of the three-year tail.
3. If real estate is part of your business sale, look carefully at the broker’s commission.
In the DC metro market, the typical commission on commercial real estate is around 6%. Well, if you contract with a broker at 10% or 12% of the sale price of your business, that 10% or 12% could apply to the sale of your real estate as well. Not all brokers apply the same commission to both the business and real estate but some do. Again, we recommend that you review any engagement agreement with your advisors.
4. It is not the broker’s job to walk you through anything other than closing.
It is not a broker’s job to tell you how taxes will affect your purchase price or whether the sale will meet your financial objectives. If keeping your business is the only way you will reach your financial goals, don’t expect to hear that recommendation from a transaction intermediary.
Their experts prepared to sell your business, but a broker is an expert in just that: only selling your business.
5. The more time you invest in preparing your company for sale, the more likely it is that the sale will achieve your objectives.
It takes time to clean up financials, document processes and create written growth plans. More sophisticated buyers—those with deeper pockets—expect those when they choose to invest in a company. All buyers want assurance that the success of the companies they are buying does not rely on you—the soon-to-be former owner. That means that the incoming owner must have the same skill set as yours or that you must leave behind a management team capable of continuing your company’s success.
As exit planners, we know that putting a management team in place takes time. We also know that the more time owners put into laying the foundations for their exits, the more options they have and the better their sale prices. You simply can’t wait until your company is under contract with a broker to complete those tasks.
Sell Your Business with the Right Broker—Talk to Your Trusted Advisors and Get the Most for Your Business
Choosing a business broker is too important to your long-term success to leave to a flashy website or well-timed cold call. They may be the trusted expert you need, but you could also be leaving money on the table if you go with the first broker you see.
And, as part of selling your business to a broker, you should look at your options and talk to your trusted advisors. If you are looking to discuss more details about the process of hiring the right broker for your business and how best to work with them, just give us a call. We’re happy to help our expertise, make your future.