I often get asked the question – “Are business brokers worth the fees they charge?” I have handled numerous sales of businesses with and without business brokers and wanted to provide this information in an unbiased manner to help those who are thinking about purchasing or selling a business. I want to arm them with valuable information as to what a business broker brings to the table.
Not being experts at buying or selling businesses, many business owners use the services of a business broker to assist them in this regard. Think of a business broker as a middleman between business buyers and sellers.
Pros of Using a Business Broker
- Experience in Valuing a Business. Business brokers have extensive knowledge in valuing businesses and can usually derive a business value that is fairly accurate. Without a business broker, it is tough for sellers to accurately place a realistic valuation on their business.
- Help in Presenting the Business. Business brokers are particularly skilled at packaging a business to showcase it in its best light. Without a business broker, a seller may not be able to market their business in a way that is attractive to buyers.
- Experience in Evaluating Buyer Intent. Business brokers are able to quickly ascertain whether a potential business buyer is serious or just kicking the tires. By comparison, a seller who is not using a business broker may invest considerable time in courting a potential buyer who turns out not to be serious or qualified.
- Help in Attracting Buyers. Business brokers know how to attract buyers. In many cases, they have a database of buyers and send out business-for-sale alerts to their database whenever they have a new business listing.
- Ability to Convert Inquiries About Buying a Business into an Actual Sale. A good business broker can create competition among potential business buyers in a way that moves the sale of a business along. When sellers make an offer, the business broker can interpret the offer and even suggest changes to an offer that will make it more likely that the business sale will occur.
- Confidentiality. Business brokers work in a confidential manner, keeping the sale of the business in confidence so that competitors, employees, suppliers and others are not informed that the business is for sale.
- Service as an Intermediary. As Buyers and sellers generally do not trust each other, the business broker can serve as a middleman to interpret communications and steer the buyer and seller towards compromises whenever possible.
- Expertise in Business-for-Sale Transactions. Finally, the business broker knows all the details required to close a sale transaction. Typically, a buyer and seller may not understand all these nuances so it’s good to have an experienced business broker iwho can help facilitate the process.
Cons of Using a Business Broker
- One-Sided Interests. Remember that since the business broker typically represents the seller, if you are looking to buy a business, the broker’s interests may not be aligned with your interests. While most brokers can be very helpful, potential buyers need to realize that the broker is not on their side.
- Payment of Brokerage Fees. Brokers will typically take a commission in the range of 6-10% of the total business selling price. Due to such, many sellers consider doing a FSBO (For Sale By Owner) sale to see whether they can sell their company without the assistance of a business broker.
- Incentive to Sell at Low Price. A business broker gets paid when there is a sale, so their is the perception that they will underprice a business in order to sell it quickly. For business brokers, the difference between selling a business for $500,000 as opposed to $600,000 is only 6% of the $100,000 difference – or $6,000. However, for the seller,that amounts to a $94,000 difference. By selling for $500,000, the broker walks away with $30,000, which he may be more than happy to do – however, it may come at the expense of the seller.
- Competency Level Differ. Finding a quality business broker can be a challenge. since the industry is largely unregulated. In some cases, individuals with little experience or expertise can hang their shingle out that they are open for business as business brokers. Be careful. If you engage an incompetent business broker, it could be disastrous.
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