Business Brokers / Business Transfer Agents
What is a Business Broker and Should You Use One?
A business broker is similar to a real estate broker to the
extent that they try to put buyers and sellers together. Instead
of real estate being sold, they focus on businesses. The criteria
to become a business broker varies from country to country and
their individual training, history, specialty and area of expertise
are things that you must investigate. Some brokers work independently
while others work for a brokerage company. Business Brokers
work on commission and if you do not ultimately buy a business
then any work that they have done for you is not compensated.
I believe that you should absolutely hire a business broker!
However, it is critical that you hire the right one. A Business
Broker will provide you with access to businesses that are available
for sale that you would never be able to find on your own. They
can narrow the search for you to businesses that fit your criteria
and they can help you avoid a lot of wasted time. The one thing
that brokers cannot do no matter how good they may be is to
find a business that is right for you. This is something that
only you can do. Brokers clearly prefer to work with knowledgeable
buyers and if they have to spend their time educating you then
they cannot make money. They can be an effective tool for you
to use if you can provide them with a clear mandate of what
it is that you are looking to buy. Avoid generalities; explain
your strengths, weaknesses and objectives and never mislead
them.
Understanding Their Challenges
Ninety percent of the potential buyers that brokers work with
never buy a business. While this is part of the risk involved
in their chosen profession, this does not give you the right
to waste their time. Accordingly, they may be somewhat hesitant
when working with new clients until you demonstrate your sincerity
and commitment to buying a business. There is no doubt that
if you are a serious and educated buyer then a good broker will
go above and beyond the call of duty to service your needs.
Be respectful of their time and realize that they have to make
a living. If at any time you decide to drop out of the hunt
to buy a business then let them know immediately. Conversely,
if you do not feel that they are extending their best efforts
on your behalf then find another one.
How They Can Help You
There are two significant ways that a broker can help you.
First, they can provide you with listings and information on
businesses that are available fro sale that you would not discover
on your own. In other words, they have the database from which
you can search. Secondly, they can be "used" as the "bad guy".
Once you get into negotiations with a seller you should let
the broker deliver any bad news or commentary that you may have.
The reason for this is because you are going to need the seller's
help in completing the deal and thereafter for training and
assistance. By letting the broker deal with the bad news you
can maintain the integrity of your relationship and keep yourself
in a third party position somewhat if renegotiations are needed.
How They Can Hurt You
If you use the wrong broker they can hurt you significantly.
They will be a monumental waste of your time. They can send
you looking in the wrong direction altogether. They can try
to work both parties and may not make you privy to everything
that they are discussing with the other broker. If they represent
both you and the seller their agenda may not be upfront and
they could very well be in a conflict of interest position.
This is specifically why you must control the negotiations and
use them properly or you may find yourself terribly frustrated.
Where To Find One?
Check your local classifieds to see which brokers seem to have
the most prominence and exposure in the "Businesses For Sale/Business
Opportunity" section. Start by calling these. Also, if you are
aware of any business that have recently changed ownership,
call the new owner and ask them for a recommendation. Speak
to lawyers, accountants, friends, family, businesses associates
and ask them if they can suggest anyone. Do not think a broker
is good just because your accountant said so. You have to check
them out and the only way to do so is through client references
and one other test (see "How To Hire The Right One").
How To Hire The Right One?
Before you hire an individual broker arrange to meet with the
owner of the brokerage firm. Let them know as much as possible
about your goals, experience, wants and needs. Have them suggest
a broker to you from their stable who they believe will fit
best with you. Do not allow yourself to meet with the broker
that they may recommend yet. Tell the owner that you prefer
to contact the broker to set up a meeting.
When you call a potential broker, if they do not return your
call within 24 hours forget about them as a candidate. When
you do speak with them, don't tell them that you met with the
owner and don't agree to go to their office to meet them. Tell
them that you want to meet them outside. Find out where their
office is and where they live then arrange to meet them 20 miles
in the opposite direction at a weird hour (i.e. 7:00 am on a
Sunday morning). This technique will demonstrate very quickly
how committed they are to getting you as a client.
Checking Their References
Get the names of buyers and sellers that they have worked
for in the past. Once they give you the list of 4-5 of each,
ask them for a couple more. The reason you want to do this is
because they will naturally give you the names of people that
they believe are pleased with them so try to get some additional
ones. Contact each one of these and ask them if they could tell
you what they believe the broker's strengths and weaknesses
are. Be sure to ask each one if they were going to buy or sell
a business in the future would they use them again. Tell them
the approximate price business you are looking for and ask if
they feel that the broker is well suited for your needs. Ask
them what it is specifically that the broker did well or poorly
for them.
Exclusive Agreements
Some brokers may try to get you to sign exclusive representation
agreements with them. Under no circumstances whatsoever are
you to do this! Make it very clear that you will be pleased
to work with them and that the best measure that they can take
to ensure that they earn a commission from you is to lead you
to the right business. Some brokers may request an application
fee. If you believe that the broker is right for you then you
can consider it if it's a small amount. They must put in writing
that if they do not perform their duties then the money will
be refunded, no questions asked and when you buy a business
if they are involved in the transaction then they must also
refund the money. They will ask you to sign Confidentiality
Agreements for any individual listings they show you. This is
for their protection and it is only fair if they show you a
business first, then they should make the commission if you
buy it. Have a lawyer review it briefly in any case.
Their Commission
The seller is responsible to pay their commission from the
proceeds of the sale. Ask the broker to send you a copy of the
agreements that they have in place with sellers so you understand
the terms and conditions of their agreements and to see if you
have any exposure whatsoever. Generally, the commission is 10%
of the total deal regardless of the terms of the agreement and
this amount is split between all of the brokers involved. Furthermore,
if they work for a brokerage company, part of their share goes
to the company. So, when all is said and done, they don't make
as much as you think so don't feel that they are making money
at your expense. Good brokers earn their money; bad ones should
not be allowed to handle your business.
What If They Don't Perform For You?
It's very simple; if you do not feel that the broker is working
out well then find another one. Remember, they are entitled
to receive a commission for any businesses that they may have
shown you, so when you hire a new one give them all of these
details and have them document how the broker's commission will
be split in the event that you buy a business that your previous
broker introduced to you.
An Expense That Makes Sense
Even though your broker may earn a handsome commission from
the business you buy, they are always at risk of earning zero
if you don't buy. Never begrudge their commission; if they do
their job, they are entitled to it. Whenever you meet with your
broker over coffee or lunch always pick up the tab. It's a good
way for you to express your appreciation for them doing work
on your behalf not knowing if it will evolve into any compensation.
It really is the right thing to do!
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Due Diligence
Due Diligence is the period when you will be able to access
the company's books and records to verify that all of the information
that you have been told thus far is true and accurate. Most
often, people unwisely believe that Due diligence is simply
the time to verify the financial position of the company. While
this is true to some extent, a proper and effective Due Diligence
goes way past the financials. Sure, you want to be certain that
what you have been told is true but realistically even if the
numbers are exactly as they were presented to you, then what?
All you would have is a confirmation of the past but absolutely
no inclination of what the future may hold for the company or
the industry.
The Right Approach To Due Diligence
Is this the time to look for things that are wrong with the
business? Is this the time to strictly verify numbers? Is this
the time to disprove what you have been told by the seller?
While each of these approaches is somewhat valid none are absolute.
Sure, you will want to employ a part of each of these strategies
but an effective Due Diligence is when you can really "check
things out". Without question, your approach is to use this
period to determine whether or not the future looks bright for
the business and the industry. To do so, you must investigate
far more than the financial aspect. Sure, the various financial
statements will give you a picture of the past and perhaps a
glimpse of the future but the past is over and done with. You
must thoroughly review the company's sales, marketing, employees,
contracts, customers, competition, systems, suppliers, and legal
and corporate issues. You want to complete the Due diligence
period knowing exactly what you are getting into, what needs
to be fixed, what the costs are to fix them and if you are the
right person to be at the helm to put the plans in place to
make a great future for the business. In other words, learn
everything before you buy!
How Long Do You REALLY Need
Every seller and every broker working for the seller will try
to negotiate the shortest Due Diligence period possible. I have
heard situations where this was limited to a week or so. You
must be aware that unless you have intimate knowledge of a particular
business it is impossible and reckless to believe you can truly
get a feel for a business in this short a time. The shorter
the period the greater the number of surprises you will find
out later. Moreover, the chances are that you will not be able
to learn enough about the business so you will probably abort
the purchase. Or, worse, you will buy the wrong business or
negotiate terms and conditions that are highly unfavorable.
You need at least 30 days (20 working days) for even the smallest
of companies. Since a proper investigation reaches farther than
just financials you must allow yourself adequate time to accumulate
the information. This strategy lends itself to wondering how
to get the seller to agree to this time frame. It's actually
quite easy; let the seller know exactly what it is that you
will be investigating. Tell them that you do not want to back
out of the deal and if they truly want to move forward with
the purchase they must allow you the time to do the proper investigation.
Let them know that you want to buy the business but if they
don't let you confirm your commitment through proper Due diligence
then you will have to walk away before you start-when you position
it this way, you'll get what you want!
Preparation
Your preparation must begin the moment you believe that the
business may be worth pursuing. In fact, after you meet the
owner the first time and believe that you may be interested
you should begin to organize your plan. No matter how early
you are in negotiations, at least start think of what it is
that you need to do. Start lists and note areas and specific
details related to the business that warrants further review.
Once you get closer to a deal keep detailed "to do" lists, broken
down by each sector of the business (i.e. Financials, Employees,
Sales, Contracts, etc.). Keep your accountant informed of when
you anticipate beginning the Due Diligence. Assemble lists of
the materials you will need from the company and never ever
begin the Due Diligence until you have received all of the supporting
documents that you will need from the seller.
Should You Hire An Accountant To Help You?
Absolutely and without question you should use an accountant
for this exercise. Even if you are an expert in this area, get
an accountant to run the numbers and verify all of the financial
activity. There is so much more that has to be investigated
that your time is best spent on these areas and hire a professional
to help with the financials.
[ Find
an accountant ]
Getting The Seller and Their Staff To Cooperate
The seller must let his people know that they are to provide
you with full access to all files and complete cooperation throughout
your investigation. Don't let the seller "think" that you are
snooping; let them know in the clearest of terms that you are
snooping! That's your job. If there is anything that they do
not want you to see, then tell them to remove it from the premises.
What If You Find Surprises?
This should probably be titled: "What to do "WHEN" you find
surprises" because you will. If you don't, you haven't looked
hard enough. Deal with each on its own and make sure that you
thoroughly investigate each so that your facts are bulletproof.
However, don't get bogged down with minor issues and you are
best to take these as "part of the package". Unless you find
something that cannot be resolved or is so detrimental that
even if the seller lowered the price by 50% you would still
have to walk away you are best to take all of these obstacles
in stride. Don't publicize them; investigate them. A few issues
doesn't mean that the business is bad. You must weigh them impact
against the future viability of the business. Remember your
goal is to learn what it is you will be getting into and what
the future can be with you in charge. The option always exists
for you to renegotiate once your investigation is completed.
You will be in a much stronger position if you can go to the
seller with very specific concerns, which require reevaluation
and renegotiation. With this in mind, do not discuss your findings
with anyone except your accountant or other advisors. Not the
seller, not your broker, not the employees.nobody. It is not
their business!
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Valuing a Business
There is probably no part of the buying process that worries
a potential buyer more than overpaying for a business. While
this is understandable (who wants to pay more than something
is worth), it has more to do with misinformation and one's total
approach to buying a business than it does to being an expert
at appraisals. The truth is, value is completely subjective.
After all, what one business may be worth to you is entirely
different from what it is worth to the next person. While there
are cases where people may not negotiate the best price possible
for a good business you must know that no price is cheap enough
if you buy the wrong business. In time, a good business will
always justify the purchase price whereas a bad one may not
ever allow you to recover financially.
What is Value?
In a nutshell, value must be measured by what you are getting
in return for your money. You have to equate the purchase price
against the benefits you will derive over the term in which
you can realistically expect to own the business. As an example,
you cannot simply measure the purchase price against the income
that you will derive from a specific business. What about the
daily enjoyments you will get from being your own boss? Or,
the sense of accomplishment you will feel from building something?
Maybe, it's the gratification that you will get from contributing
to the lives of others (i.e. employees). Perhaps it will come
from knowing that from the toils of your labor you have been
able to provide certain things for your family that you could
never even consider if you were working for somebody else. A
good business will provide abundant rewards for you so in order
for you to truly measure a business' value you have to consider
all of the benefits that you stand to gain. Also, you must factor
in what you could never have achieved if you don't go into business
for yourself.
Think of it this way: the average person takes 30 years to
payoff a mortgage and 5 plus years to pay off a car. Neither
one of these will pay you a salary. While they both have their
benefits, neither one comes close to what you can derive from
a good business as far as overall benefits are concerned. Even
with a home where you will build equity won't a good business
do the same thing? Therefore, why shouldn't you take 3-5 years
or longer to payoff a good business?
Traditional Valuation Methods
There are two main valuation methods which are far too complex
to fully explain in a short article. These are Asset Based Valuations
and Cash Flow Multiples. In the former, a value is attached
to all of the assets of a business (machinery, equipment, etc.)
and you purchase the assets accordingly. Generally, small business
purchases do not use Asset Based Valuation Methods to establish
the purchase price. For Cash Flow Based Multiples, a formula
is used that combines the company's profits, owner benefits,
adds back certain expenses and then applies a multiplying factor
to this number to establish a purchase price. This is the method
that is most commonly used and a general understanding of accounting
principles is required to make this calculation. The multiples
that are used are generally based upon what other like businesses
have sold for but as a very general rule it is usually one to
three times the cash flow.
Why These Methods Don't Work?
Despite their ongoing use, traditional valuation methods are
so subjective that it is impossible to endorse them as foolproof.
For example, there is no way that you can use other like businesses
as a realistic barometer because no two businesses are the same.
Furthermore, the financials being used are historical date and
since the past is over and done with how can you accurately
use the past to predict the future? Insofar as Assets are concerned,
unless you fully validate the usefulness of the Assets this
too becomes subjective. Notwithstanding the inaccuracies of
these methods, you should use a factor of each to value a business
from every angle possible and then balance it all with what
the value of the business is to you.
No Two Businesses Are Alike
Although traditional valuation methods will use other like
businesses for comparative purposes do not allow yourself to
be lulled into believing that any two businesses are really
alike. You may want to explore these situations to see what
businesses may have sold for, but you are guaranteed that there
are always enough differences to render these comparisons inaccurate.
The only time where you can pay attention to a similar business
is when investigating a franchise. Even in these situations
there will always be an abundant amount of differences such
as location, owners, marketing strategies, etc., however the
business model itself is supposed to be exact so there is some
credibility to making comparisons. You may want to have your
broker pull the details on others businesses in the same field
to see what the Asking Price was, earnings, down payment percentage
and expenses, but other than that, remember that just like human
beings, every business is unique.
Good versus Cheap
If your intentions are to find a cheap business you must be
prepared to never find one or to deal with one that may never
turn into what you had hoped that it would. It's akin to buying
a cheap used car versus a good used car that you have checked
over extensively. Yes, there is a chance that you will get lucky
and get one that runs relatively trouble free for as long time,
but the odds are that you will get one that requires ongoing
maintenance. Now, this may be fine for your basic transportation
needs but if you need a vehicle to work as a sales rep on the
road where down time means lost revenue then you would want
a vehicle that is highly reliable wouldn't you? The same applies
for a business; there is far too much at stake to buy something
just because it's cheap or affordable. Unless you are a business
mechanic you will probably spend so much time fixing it that
you won't have time to run it. If you want to dramatically improve
your chances for business success then look for a good business
that can become great.
How Long Do You Intend On Working?
If you are 55 years old and only want to work for another 5-10
years, your value will be dramatically different for a certain
business than an individual who is 15 years younger. You have
to consider your overall health, energy level and the payout
period on the business relative to the amount of years that
you realistically can and will be willing to work.
[ Back to the top! ]
Richard Parker is the author of How
To Buy A Good Business At A Great Price ? the most widely
used reference resource and strategy guide for buying a business.
This comprehensive simple to follow guide contains 420 pages
of expert tips, proven strategies and winning negotiating techniques.
Mr. Parker has purchased ten small businesses in the past 14
years. As President and founder of Diomo Corporation - The Business
Buyer Resource CenterT, his materials have helped thousands
of prospective small business buyers realize their dream of
business ownership His programs are sold in over 50 countries.
Available in hard copy or via immediate electronic download.
To learn more click
here.
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Legal Document Templates
Simply Docs
provide a number of legal document templates including some
related to aquisitions.
Business Insurance
An other factor that you should take into consideration is business insurance. You may have life insurance coverage for yourself but that is just for personal matters. It is important to insure your business. This is an expense that most of us would prefer not to pay but it is necessary to comfortably develop your business.
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