Should you engage a business broker to sell your business?
As an entrepreneur, selling your business is likely to be the biggest and most important deal of your career. It’s certainly not something you want to go into half-cocked and it helps to have as many experienced hands as possible in your corner. However, while it might be tempting to follow in the footsteps of countless others and hire a third-part business broker to help market and sell your business, there’s something you should know first: There are more bad brokers than there are good brokers.
With this sobering knowledge out of the way, it’s important to note that there are good eggs out there that will set you on the right path. But picking a bad one is a very costly mistake to make and the odds are not stacked in your favour. It’s a mistake that thousands of business owners looking to exit the market make every year. But it’s one you shouldn’t have to make.
What is a business broker?
As the name suggests, a broker exits to facilitate (or broker) the sale of a business from one party to another. They are the real estate agents of the business world and can be just as ruthless. They sell themselves on their experience and the fact that most entrepreneurs have never sold a business before. So they are essentially trading on your nativity.
There are certainly benefits for business trading above a certain value and for those who might not be 100% certain of their negotiating skills. But if you’ve spent the best days of your life building a business from the ground-up, do you really want to put its fate in the hands of someone who doesn’t understand or appreciate what you’ve achieved?
Why use a broker?
It makes sense on paper. A broker uses their knowledge of the market to price a company and then argue a case for that price and the company’s worth to potential buyers. However, the brokerage market is unregulated, which is always a recipe for bad reputations.
Of course, it’s not all bad apples. Indeed, a good broker is more than just a middleman – they are a steady guiding hand through what can be an incredibly complicated and challenging process. But finding a trustworthy and reputable broker is easier said than done, particularly for smaller businesses.
The advantage of using a broker is the access you get to their market and their contacts but in essence, there’s very little a broker can do today that a good social media search can’t match. It doesn’t matter who is doing the selling – a business is only worth what somebody is willing to pay for it. All the broker is doing is fixing a price tag to your company and in some cases, they might even push your price down to close a deal.
How are brokers paid?
Their fee structures vary, so going through the terms and conditions with a fine tooth-comb is critical. Tedious, but critical. Generally speaking, a broker will either ask for an upfront retainer or a success fee, which you’ll be asked to payout after a successful sale. Both have unique pitfalls and many brokers will use a mix of the two, typically with total fees set at around 10%. However, this can be much higher for smaller businesses as they tend to have a fixed minimum fee expectation.
Upfront fee – The problem here is that the broker’s incentives are not aligned with yours. They’ve already made their money right off the bat so are less incentivised to sell your business quickly at an attractive price. It’s like paying your estate agent the full fee when listing the house, rather than when the sale is completed.
Success fee – This is a no-sale, no-fee arrangement that is normally set as a percentage of the price for which the business sells. Of course, the benefit here is that the broker is more heavily incentivised to get a good price, as they have some skin in the game themselves. The drawback, however, is that there are often subtle traps hidden deep within the terms and conditions. Indeed, in some cases, even if it takes years for your business to be sold and the eventual sale has nothing to do with the broker, you could end up still owing them their ‘cut’.
The real motivation of the brokers is to get you signed up and hooked into their fee structure on a chunky retainer and they will achieve this by hook or by crook. They’ll make undeliverable promises and assure you values of 5-7 times your annual profits. But that’s at best spin and at worst flat-out misleading. The average multiple of earnings for which a business sells in the UK is approximately 2.5-3.0 times sustainable net profit and this is typically paid out over many years.
The stark reality
Unless your business is turning over £10m it’s unlikely you’ll be able to afford a good quality business broker. That means you’ll probably end up looking towards the value end of the market and in those waters, you’ll find nothing but sharks – volume players earning their money on an upfront retainer rather than by selling your business.
Once they have you signed up, you will likely be dealing with someone who has no real qualifications or experience in evaluating businesses and preparing them for sale. To them, your business is nothing but a statistic to be filed alongside the hundreds or thousands of other businesses they’re trying to sell on a few websites. Years later, when your business finally does sell, they’ll be walking away with a tidy fee for doing practically nothing. This is a story we hear time and time again.
The personal touch
Small business merger and acquisition is a buyers market and it always has been. Of all the businesses listed for sale in the UK, less than 10% actually sell and brokers will always use this fact to their advantage, not yours. So don’t take them at face value.
Ultimately it’s up to you as the business owner to see through the marketing spiel and focus on the facts, the fees and the finer details. Never settle on a broker without doing your research and always ask for thorough details and references of their previous work, particularly pertaining to companies similar to your own.
There is, however, another way. Selling businesses effectively is a real skill that requires time, preparation and resources, which is something that most small businesses cannot afford. To achieve a profitable exit, that protects your legacy you need to work with people that have done it before and will work alongside you in partnership to deliver a successful exit.
That’s where Perpetual Equity steps in. We are entrepreneurs ourselves who understand the mergers and acquisitions market and will work with you every step of the way to ensure your business ends up in the best possible hands and you can move comfortably into the next chapter of your life. So, if you’re ready to sell your business and want to do so without having the wool pulled over your eyes, get in touch with us today.