How To Sell A Small Business Without A Broker – When it comes time to sell a small business, small business owners can hire a business broker to sell their business, just as a homeowner hires a real estate agent to sell their home.
Some small business owners choose to sell their business without the help of a business broker, which has some pros and cons.
How To Sell A Small Business Without A Broker
Some of the reasons small business owners decide it’s time to sell are: health issues, lack of passion for work, new interests outside of the business, owner putting the brakes on the business, owner lacking a transition plan, owner’s spouse says it’s time to sell. , owner must diversify and/or partners differences.
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If you find yourself in any of these positions, we go into more detail about questions you may be asking yourself in another blog titled Is It Time to Sell Your Business?
Investopedia provides a good overview of whether it’s time to sell and how to plan for a successful outcome that starts by asking yourself why, given the time to sell, you get an estimate of trade value (consider using our trade value calculator to get an estimate). for just 5 minutes), broker considerations, preparing documents, finding a buyer and handling the financial components.
After the decision to sell is made, the business owner must prepare the business for the sale process. At the most basic level, this involves making sure that financial records and operations are in order.
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Want to know more about the details? The National Federation of Independent Business offers a robust sales preparation checklist that emphasizes requalifying the buyer and preparing an exit strategy in advance.
Over the past two decades, we’ve developed a simple framework for determining whether a business is ready for a successful sale.
The five success criteria are a basic assessment that any small business owner can complete before selling their small business. A more comprehensive business valuation may also be appropriate if the owner wants to maximize sales revenue.
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An additional key decision to make when selling a small business is whether or not to hire the services of a business broker.
A business broker is a person who helps sell small businesses (typically $5 million or less in revenue) or major businesses (eg dry cleaners, convenience stores, etc.).
Many are affiliated with larger commercial brokerages (just as real estate agents are affiliated with large brokerages like Re/Max or Keller Williams), although some work independently. Licensing requirements for business brokers vary widely from state to state.
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Corporate brokers should not be confused with investment bankers who provide a wide range of advice to larger companies on capital raising, mergers and acquisitions and other more comprehensive capital market services.
The decision to hire a business broker to help sell your small business depends largely on the situation the small business owner is facing.
We believe that hiring an experienced and competent broker is a better route for most business owners than not. Small business owners are experts in managing their business; they are not experts in understanding how to sell a business successfully.
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Business brokers offer guidance to avoid common pitfalls in an often complex process: Preparing a business for sale, marketing the business to potential buyers, navigating due diligence, negotiating the transaction, completing legal documents and closing the sale is a complex process. with many potential pitfalls. . Having a solid guide in this process will benefit most small business owners.
Brokers maintain a network of potential customers for small businesses and provide access to this network and market to them. Access to multiple interested buyers is critical to identifying a potential match and creating a competitive process that ensures the seller achieves a successful outcome.
The best brokers will have a track record of successful transactions (backed by buyer and seller references), experience or knowledge of the industry in which their company operates, and the ability to provide a strict and detailed timeline for completing the transaction.
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Identifying and hiring a good business broker is no different than selecting any other vendor, and small business owners are often experts in the vendor selection process.
Maintaining a positive relationship between the seller and the buyer is important to getting the transaction across the finish line, especially if the seller will be working with the buyer after the transaction closes. A business broker can often serve as an intermediary between a buyer and a seller.
A successful sales process involves the input of various experts outside the commercial intermediary. Brokers often arrange a panel of experts, including experienced transaction attorneys, tax advisors and estate planners, among others, to help complete the transaction and resolve transaction-related issues before and after closing.
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For example, brokers, transaction attorneys, and tax advisors often work together to ensure that the seller can minimize the tax associated with the sale of the business.
The standard brokerage fee or commission is usually based on Lehman’s commission structure. The Lehman fee structure was developed by Lehman Brothers and is the most common fee structure in small business mergers and acquisitions. We wrote an additional blog post covering Lehman’s fee structure which you can read here.
So for clarity, a sale of $10 million results in a fee of $200,000. Check out the visual below:
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Some brokers may charge a fixed commission structure, such as 3%. In almost all cases, brokers will request an advance against the final commission or commission to cover certain costs and expenses, as well as to confirm that the selling party is committed to the sales process.
Hiring a broker requires the business owner to trust that the broker will lead a structured process that will accurately bring the business to market. For some entrepreneurs, this perceived loss of control over the next critical phase of their business is very difficult to imagine.
Just like selling a home, the broker has an incentive to close the deal in order to receive a commission or commission. Business owners should be aware that this incentive mismatch exists and that a bad deal for the seller can be a good deal for the broker.
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As noted above, we believe that hiring an experienced and competent broker is often in the best interest of most small business owners looking to sell their business.
For anyone facing any of the above situations, here are the benefits to consider when selling without a middleman.
Without the services of a business broker, a small business owner can avoid a transaction fee or commission as described above.
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Many small business owners are used to being the complete and sole authority on important decisions related to their business.
Working with a business broker can be uncomfortable for some small business owners because it requires them to rely on a third party to effectively communicate with clients about their business. Who knows my business better than me?
Just like selling a home, the broker has an incentive to close the deal in order to receive a commission. A bad deal for a seller can be a good deal for a broker.
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Choosing not to work with a broker can eliminate the concern that the broker may not have the business owner’s best interests at heart and ensures that the seller has their best interests at heart.
A successful broker must be able to create a wide market for business by identifying and communicating with many buyers.
Without the support of a business broker, a small business owner may limit the number of potential buyers and thereby forgo the opportunity to create a situation where multiple bidders are competing to buy the business.
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A successful sales process involves the input of various experts outside the commercial intermediary. Without the Rolodex of a successful business broker, an entrepreneur will need to assemble his own pool of experts, including experienced transactional attorneys, tax advisors, and estate planners, among others.
A good business broker will advise the seller on the company’s valuation expectations, required terms of sale and other important market knowledge.
Selling a business without a commercial broker will require the seller to develop this knowledge by investing time and effort in getting to know the market.
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Maintaining a positive relationship between the seller and the buyer is important to getting the transaction across the finish line, especially if the seller will be working with the buyer after the transaction closes. A business broker can often serve as the “bad guy”/middleman between buyer and seller.
Most small business owners will only sell their business once. They are not experts in the process.
Managing the sales process without a commercial intermediary will require a significant investment of time by the business owner in searching for potential buyers, preparing a concise overview of the business, discussing opportunities with identified buyers, preparing materials for a detailed analysis etc. And, the time and focus spent on the sales process limits the time owners spend on execution
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