How to Hire or Retain a Business Broker Including Business Broker Fees and Terms

Gregory Caruso, Esq., CPA, CVA

www.harvestbusiness.com

gcaruso@harvestbusiness.com

Business Brokers go by many names, Business Brokers, Investment Bankers, Intermediaries, Acquisition and Merger Specialists.  Business broker’s success fees or brokerage fees can be structured multiple ways but most are in the form of a back end commission.  Business brokers work to sell your business while you work to maintain outstanding profitability during the sales period.  This combination will result in the highest price.  These people perform a variety of functions, usually anything not being done by another specialist. 

Business broker’s primary goal is to increase the sales value and shorten the time on market of the business by determining the best buyer and be creating a large market of those buyers generating an auction environment when possible.  The International Business Brokers Association estimates that Business Brokers on average add 15-20% to the value of a transaction.  www.ibba.org. 

Business brokerage fees tend to be a percentage of the transaction value and tend to fall as the transaction gets larger.  Often there is also a minimum business brokerage fee.  A common business brokerage fee structure for a small transaction might be the higher of a $15,000 minimum fee or 10% of the sales value.  Sales value tends to include cash, liabilities assumed, non-competes, owner’s compensation.  In effect, every way the seller is making money from the transaction.  Commissions tend to be collected in full on notes taken back by the seller at settlement.  If an earn-out is involved the commission will typically be paid as the money is received since it is speculative.  In many cases the broker will barter a reduced fee on earn-outs for payment at settlement to simplify everyone’s accounting. 

On larger transactions around $1,000,000 or more the minimum business brokerage fee might be $75,000 and a fee schedule of 10% on the first million, 8% on the second million, 6% on the third million, and 4% above that.  This is known as the double Lehman.  Very large transactions over $10,000,000 in sales value are completely negotiable.    Just remember the important question is not what does the service cost you, it is who can help you make or keep the most money after paying all expenses. 

Retainer or other up-front fees – On smaller transactions the broker might ask for $500 to $1,500 as a non-refundable retainer.  We have never bothered on small deals but many brokers do.  We generally figure we can give about 6 hours of time to understanding a prospective transaction i.e.  understanding owner needs, a quick and dirty valuation, and a snap-shot market review. 

Remember, even if the business broker does not charge an up-front fee they will request a six month to a year minimum sales period (we always ask for at least a year or more on transactions.) This is a lot of your time if you are stuck with an incompetent broker.  Therefore, even though it is “free” if they don’t sell the business, make your choice wisely.  For more complex businesses a retainer in the range of $15,000 for a valuation and business write-up is reasonable.  We know several brokers who obtain between 10-20% of the total estimated fee as retainer either at the time of the listing or paid over the first six months. 

For larger businesses with revenues over $20,000,000 it may cost $15,000 to $30,000 or more for the brokerage firm to really break apart the financials and understand what is going on with the business and the market.  We know a quality broker that charges $5,000 per month for the first 6 months for his larger clients.  If you are being asked to pay a large fee make sure you talk to satisfied clients.  Do not let a broker use the cloak of confidentiality to tell you his clients are not accessible.  Good business brokers have plenty of clients willing to talk to you.  If they will not let you talk to past clients run, do not walk to the next broker.  If the story is too good to be true, be careful also, stories of European (Asian this year) buyers for small local companies with limited internal management are just not plausible, (if you can’t take a vacation, how are they going to run it from half way around the world) especially at a value of two to three times current market value.

Depending on the transaction you are planning and the size and complexity of your business it may make sense to pay a large upfront fee.  Unfortunately there are several firms, some backed by very well-known public companies that essentially take very large up-front fees, provide a great package, and then provide very little brokerage services while tying up the Seller.  Bigger is often not better in business brokerage and intermediary services.  Do your homework and hire the right broker at the right fee for your business sale.

Lending Update in 2011

By John Gibson, Partner

We are hearing that banks say they have money and want to lend it but they can't find enough qualified borrowers. At the same time, borrowers who are looking for loans say their banks are just paying lip service, looking for a way to turn them down.

Who is right? In a way, both are.

Uncertainty and fear have produced cautious bankers. 2011 is a little better than 2010 and much better than 2009. Banks are tip-towing back in, but they are fearful. They are afraid for many reasons. Fear of the unknown. Fear of loss. Fear of federal and state regulators glaring over their shoulders and writing down loans. Even Fear of losing their jobs.

What can you do to improve your chances in this environment?

It's back to basics. Start with the 3 C's; Character, Credit, and Collateral. It takes all three legs for the stool to stand. You have one first impression to win over the banker. Don't give them an excuse to turn you down. You must have a complete loan package. If you don't it will be set aside and you lose critical momentum. Point out the positives and explain the negatives. Answer before asked. All loan proposals have negatives. Letting them know that you aware of yours, not trying to hide them and what you are doing to correct them scores big character points with the lender.

In short, be prepared, stay positive but realistic and don't forget the three C's.

Growing Your Business in Difficult Times - Sales and Marketing

The two most effective growth strategies we are seeing at this time are increasing sales and marketing budgets and acquiring weaker competitors. Often the two go hand-in-hand since the owner of the smaller company often becomes a salesperson for the acquirer. This month I will touch on sales and marketing. Next month, acquisitions.

Increasing Sales and Marketing - getting an early jump on sales and marketing in order to gain market share is a proven way to grow your business as the economy restarts. At the bottom of a recession businesses and consumers stop buying anything except essentials. Even essentials are often cut back.

For instance an industrial equipment servicing firm we work with has seen repair orders slow down. They are finding that often the client will have two or three machines that need repairs in addition to the one they have been called to fix. As demand picks up all of these machines will have to be serviced and then eventually replaced.

Getting in front of these prospects early (but not too early) will lead to more sales and sales growth. Remember in all your sales efforts that the initial need is usually created because of pain. Without pain your biggest competitor, “doing nothing” is hard to overcome. Once there is pain you must focus on how your product or service provides the most value to overcome the pain and then contribute to the future of the organization. That is not the same as lowest price. If it was lowest price everyone would have Walmart watches on their wrists for $4.99 or less.

If you are in sales (or are an owner doing sales) and have never taken a sales course, do so quickly. There is a defined process to find pain, qualify, create value, and generate profitable sales.

One other thought. Recently I attended a seminar on fast growing consulting firms. The data all supported that narrow / deep niche players expanded quicker and had higher profits than generalists. While it is logical that being a generalist and not letting anything out of the net seems like the fastest way to grow data does not support that.

As an owner/manager the most important thing you can do in the sales arena is provide training and manage the process. Managing the process means understanding and tracking your pipeline. For instance if you sell consulting and a typical sales cycle is 3 months, what activities should be happening at 1 month and 2 months to indicate that a pipeline is being built.

How can you apply statistics to track your salespeople’s progress? Perhaps you generally have a meeting to perform a needs analysis a week after the introductory phone call. How many of those meetings occurred last week? By tracking statistics and then managing your marketing and sales staff you can manage your sales progress and know what to expect. More importantly you can reduce spending or change course if the current programs are not producing.

Increasing your sales and marketing efforts is a very important way to grow.

What Every Business Owner Needs to Know About Selling a Business

A few pointers business owners should know about selling a business.

• Report all income to the IRS and keep clear books and records. It is the right thing to do. If that is not enough motivation for you I have a broker friend who is old school. He and his seller pulled out the 2nd set of books – the “unreported cash” books. Unfortunately, it turned out that the “buyer” was an IRS agent.

• Do not “hide”, “ignore”, or “overlook” serious business problems. This is an invitation to a lawsuit. Every business has a few problems. Either fix your problems or provide reasonable notice of them. Different buyers will see different things as risky. For instance I was involved in the sale of a machine shop where one client accounted for 80% of total revenues. In order to overcome the problem we talked to the customer who was willing to meet with the buyer and confirm that so long as product quality and delivery commitments were met the relationship would continue.

• Have the sales contract prepared by a competent transactional attorney. Many unexpected things can go wrong after a business changes hands and a proper contract will provide protection for most of them. For instance I was involved in a sale of an engineering firm and the seller agreed to warranty obligations to the extent of and for the period that they were covered by his professional liability tail insurance. This provided reasonable protection for the buyer and seller without leaving the seller open to endless potential liability.

Selling a business is complex. Work with people who can help you get the job done right.