Selling Out: Broker's Role

You don't need to list your business with a business broker or agent in order to sell it. You may already have a good idea as to who the likely purchaser of your company would be — perhaps a key employee or a relative — in which case the marketing power of a broker won't be necessary. You may have gotten unsolicited offers to purchase your business. Or, you might decide to place ads yourself in the business opportunities sections of several newspapers or trade publications, to see if you can find a buyer without having to pay a broker's commission.

However, if you don't already have a buyer lined up, it's likely that you can benefit greatly from increased exposure to a large pool of potential buyers. A business broker can provide this for you. Perhaps even more important, a broker can guide you through the process of selling based on experience gained from many similar transactions.

A broker can contact likely purchasers (including competitors, suppliers, major customers, and investors known to the broker) directly and tell them the key facts about your business, without "naming names" until the contact has shown definite interest. The broker can also screen interested parties for financial ability and other criteria that you specify, so you won't waste time talking to unqualified buyers.

The type of broker you work with will largely depend upon the size of your business. As a general rule, business brokers are interested in listing companies valued at several hundred thousand dollars or more, although the cutoff point depends on the part of the country we're talking about. If your business is worth more than one million dollars, you may want to hire a mergers and acquisitions intermediary — a more sophisticated type of agent who functions as a consultant for both buyers and sellers and whose organization may even have in-house valuation specialists and financing available. Stock-exchange-listed and other truly large companies valued at $50 million or more will go to an investment banker (technically, a securities brokerage firm) for the additional services required in a large, complicated deal.

In a number of states, a business broker must also maintain a real estate license. Consequently, you may find real estate agents who do business brokerage as a sideline, and who are willing to take on listings that are below the normal cutoff. But as a rule, because brokers are compensated by a commission based on a percentage of the sales price, very small businesses may find it hard to locate an agent willing to take on their listing. Instead, they'll have to try to locate a prospective buyer on their own, or sell off their assets as best they can.

As with any professional, it's a good idea to ask the broker about recent sales he or she has handled, and for the names of satisfied clients you can contact. Make sure you follow up on these references. The main advantage to using a broker is experience, and you want to be sure your broker has some.

Fees and listing agreements. As you'd expect, the main drawback to using a broker or other agent is the fee. You'll be expected to sign a listing agreement, which will lay out the fee schedule. Usually, brokers' fees are contingent, meaning that they are paid only if and when the business is sold.

Business broker's fees may range as high as 10 to 12 percent of the sales price for a smaller business. Businesses over $1 million may be charged using a formula such as "5 percent of the sales price up to $1 million; 4 percent of the sales price between $1 million and $2 million; and 3 percent of any sales price above $2 million." If you go to a mergers and acquisitions professional, you may also be charged for costs and expenses, and may have to agree to pay a minimum fee whatever the sales price. In some cases, the fee will be split between your agent and an agent hired by the buyer, or you may be able to convince the buyer to pay some or all of your broker's fees during price negotiations.

Generally speaking, the larger your business, the more wiggle room you'll have in negotiating the fee structure. On the other hand, the most successful mergers and acquisitions intermediaries have plenty of business and little motivation to negotiate much on their price.

One clause you should attempt to have written into the listing agreement is that the fee will be paid at the time you receive the purchase price, not at the time the deal is closed. That way, if you wind up financing a good portion of the price over a number of years, you'll pay the agent only as you actually get the money.

Your listing agreement will be for a specified period of time — if a buyer is located within that period, the agent will be entitled to the fee. Anything under three months won't give the agent enough time to effectively market your business. Conversely, if the time period is too long, you won't be able to switch agents if you find that yours is not working effectively. Since you can always agree to extend the listing period, we suggest you initially list for no longer than six months so you can be sure your agent will get moving quickly.

You may also be able to negotiate a clause stating that if you find a buyer on your own (for example, one of your key employees decides to purchase) you don't have to pay the broker's fee. Without this clause, the broker usually must be paid if a buyer materializes during the listing period, regardless of who actually finds the buyer.

As with any legally binding document, we advise you to run the listing agreement past your attorney before you sign it.

Confidentiality. In the course of representing you, your broker may learn all sorts of confidential information about you and your business — information that could be damaging if it gets into the wrong hands. For that reason, the two of you should sign a confidentiality agreement stating that all information about your business is deemed valuable and confidential, and that the broker can only disclose it to qualified buyers for the purpose of evaluating the acquisition decision. This agreement should be included in your listing agreement, and should be examined by your attorney before you sign.

One of the key reasons for using a business broker is that he or she can contact potential buyers and whet their appetite by telling them the general facts about your business without revealing your name. Before you sign the listing agreement, you'll want to ask the broker what information would normally be revealed, at each stage of contact with potential purchasers. The contract should state that you have the right of final approval before any information is released. You should also require your broker to agree that any party who's interested, after receiving the general overview of the business, must sign a confidentiality agreement with you before learning any more details.