9 Questions You Should Ask Before Hiring a Business Broker
You have two main options available when you decide it is time to sell your business. You can try to sell it on your own, or you can retain the services of a business broker to handle the details of the transaction. While it is possible to sell a business on your own, most business owners simply don’t have the time, contacts or objectivity to negotiate a safe and fair deal.
Using a third-party professional is often the best option, but only if you hire the right broker that properly represents your best interests. Hiring the wrong broker can be the difference between not selling at all and selling for a price you are satisfied with. Here are nine questions you need to ask prior to hiring a business broker:
1. How much experience do you have selling businesses like mine?
It is important that you look for a broker that has prior experience selling a business similar to yours. Selling a restaurant is much different than selling a website. Not only is it a completely different business model, but the target buyer is much different as well. Successful business brokers will always have a number of experienced buyers in his or her back pocket, making it advantageous to work with someone that has existing connections to buyers related to your business and understands the nuances of that particular industry.
If you hire a broker that doesn’t have experience selling a business similar to yours, it will require them to learn your business and industry inside and out. This wastes valuable time that is better spent prospecting and negotiating.
2. Do you work from home or an office?
There is nothing wrong with working from home, and many companies are migrating to a virtual environment to cut costs. When it comes to business brokers though, working from home will sometimes signify that this is not the individual’s full-time occupation. The last thing you want to do is hire a broker that isn’t going to give your listing his or her full attention because they have another job that takes up the majority of their time.
A business brokerage with an office typically means that they have a full team of brokers and experts that will all work towards reaching the goal of selling your business fast and for top dollar. An office setting also gives them a professional environment to handle negotiations and meet with potential buyers. The broker you choose to hire is a direct representation of your business.
Do you want potential buyers discussing the purchase in a nice office setting or at a Starbucks? A professional image goes a long way when it comes time to close a deal.
3. How many businesses like mine have you sold?
It is important to find out how many businesses like yours they have sold. Don’t confuse this with the business type -- as there can be a huge different between business in a particular category, such as a restaurant, for example. A small mom-and-pop breakfast restaurant that seats 30 people is much different than a 200-person Italian fine-dining restaurant with a full bar.
If a brokerage hasn’t successfully sold a business similar to yours, it is in your best interest to keep looking until you find one that is experienced and qualified to handle your listing.
4. How do you value a business?
Asking a business broker how he or she values a business will give you a good indication of how experienced they are. If they give you a cookie cutter response such as “net income multiplied by two” before asking you many questions, then turn around and run. Valuation calculations have so many factors to consider -- the same formula doesn’t work for every business.
For example, you value a website or online business much differently than you would a brick-and-mortar retail business.
Most small businesses are valued on a multiple of seller discretionary earnings (SDE), which are the net profits of the business added to expenses that benefit the current owner(s) but do not necessarily benefit the business. Business valuation is a complex topic, so steer clear of any brokers that mention a generic valuation formula, as every business is different.
5. How will you prevent my customers and competitors from hearing my business is for sale?
Keeping the sale of your business confidential is very important. Make sure to find out what policies are in place that keeps the details of the sale confidential. If your customers are made aware of the sale they might interpret it as trouble -- when in reality you might be selling simply to pursue other opportunities. Additionally, you don’t want competitors to catch wind that you are exploring options to sell.
A great broker will be able to stir up interest by just providing teaser information. Once a potential buyer expresses interest he or she will have to be qualified to ensure they have the financial ability to purchase the business. Once qualified, the broker should have a non-disclosure agreement signed prior to releasing any sensitive details about the business.
6. How many qualified buyers do you have?
You might think that a broker who claims to have a large number of buyers would be a good thing, but this isn’t necessarily the case. In fact, someone claiming to have tens of thousands of qualified buyers at his or her fingertips is questionable.
It would be nearly impossible to build real relationships and qualify that many buyers. Anyone claiming to have tens of thousands of buyers more than likely has a generic email list and doesn’t know the buyers personally. A broker that specializes in selling businesses exactly like yours and has solid relationships with a couple dozen buyers is much more valuable to you as a seller.
7. Can you just list my business for $1 million?
A good broker knows how to come up with a realistic valuation and pricing strategy that will lead to a successful sale. Remember, they don’t get paid unless they sell your business, so it is in their best interest to price it correctly with two goals in mind -- to sell it while also commanding the highest possible price.
If you throw out a high, unrealistic amount and they agree to your price demand, you will be wasting your time. An experienced broker isn’t going to waste his or her time with a listing that isn’t priced correctly -- they value their time and aren’t going to waste it on a business that isn’t going to sell.
8. How many listings do you have at the moment?
Finding out how many listings a broker currently has will give you a good indication of how much time they can dedicate to selling your business. A broker with a large number of listings might be taking on every listing they can in hopes that they will eventually sell one. This "throw it against the wall and see what sticks" approach is not effective at all.
Look for a business brokerage that has between three to seven active listings per broker -- any more than this will mean your listing won’t receive the attention required to sell it. A small, manageable number per broker indicates that they understand the time and attention each listing requires.
9. Do you help with sales contract preparation? Do I need an attorney?
An experienced broker should be able to assist with the drafting of legal agreements and should have experience with different ways to structure deals. That being said, they should also advise that you hire an independent legal team to review documents before they are signed.
Use your broker for the initial paperwork and structuring of the transaction, but always have it reviewed by lawyers before you go to the signing table. With so many different country and state rules you need to be certain that all of your T’s are crossed and I’s dotted. The small legal expense can end up saving you headaches and money down the road.
Do you have any experience finding a good broker? Share your tips in the comments section below.