What Is A Business Broker? And Should You Use One?
Buying or selling a business is no walk in the park. You’ll need to go through various steps before you can enjoy a successful transaction. Can you do this alone? Yes, but you would need to spend a significant amount of time learning and doing the initial legwork. This is where a business broker can help. Renowned for facilitating the purchase and sale of businesses, working with a broker can free you to focus on other aspects of the company while they work to find a great deal. Not familiar with them? Let us tell you all about business brokers, including how they can support you in achieving your entrepreneurial goals.
What Is A Business Broker?
A business broker is an intermediary that helps people buy and sell businesses. They do this by providing guidance and other resources that an individual may require to make the transaction happen. Brokers have the information and connections to provide buyers with a list of profitable businesses to invest in. For sellers, they can help estimate the company’s value and put the asset in front of a qualified, targeted audience.
In the past, the term “broker” was used for real estate agents who facilitated the purchase and sale of homes and commercial properties. Today, it refers to a person or platform that simplifies the exchange of businesses between two parties. For example, when looking to buy or sell an ecommerce business, you can work with a website broker to help you find high-potential online stores for sale or clients who would be interested in buying your digital real estate. Exchange Marketplace is an example of a website broker.
What Does A Business Broker Do?
A business broker works to build a database of potential businesses for sale. In addition, they connect sellers with prospective buyers who are actively looking to purchase a business. Online brokers do more, offering things like integrated messaging and secure Escrow payments to increase the involved parties’ confidence. These services save you time that you can use to perform other activities (such as creating a business plan for a newly acquired business).
You may also decide to use a broker for these reasons:
- Already swamped with paperwork? An experienced broker will guide and assist you in completing all the paperwork and legalities involved in buying or selling a business.
- Brokers are skilled negotiators and know how to work around the quoted price and terms to secure the best possible deal.
- Brokers know how to present a professional image of a company. If you’re looking to sell your business, this will make it easy for you to attract potential buyers. First impressions matter.
- They have procedures to keep the business confidential. One procedure is to have the buyers and sellers sign an NDA (non-disclosure agreement) that prevents each party from sharing critical information with others.
- The best brokers offer detailed insight into the historical performance and financials of a business. Buyers don’t have to guess how much a business is currently worth and whether it is making a profit or loss.
- When a deal is made, the broker assists with the transfer of assets, and when both parties (buyer and seller) are satisfied, the payment is released and the broker receives a commission.
How to Find a Business Broker
As you can see, there are several benefits to using a broker to manage the acquisition or sale of your business. The question is: how do you find a professional, experienced, and trustworthy broker? Here are some tips that may help you with your search:
1. Use a reference
The easiest way to find a reliable broker is through a referral. Ask your partner, lawyer, friends, and acquaintances to suggest names of good business transfer agents. A pro tip is to prioritize recommendations from people who have used the broker’s service as a client. Don’t know anyone with personal experience of using a broker? Try and get referrals from outside sources to build a list of brokers you could contact. You can then narrow down the list based on each broker’s credentials and reach.
2. Check their industry experience
You want to work with a broker who specializes in arranging deals in your industry. General brokers may offer their service for a low fee, but they might not be aware of certain factors that can impact your transaction. Find an intermediary who has:
- Purchased and sold businesses in your niche
- A proper platform for viewing businesses
- Technical competence to estimate a business’s value
You should be able to get an idea of a broker’s experience through their reviews. You can also view the “about section” of their site to learn when they started operations and how they tend to serve clients from your industry.
3. Look at the number of listings
Check how many businesses the broker has put up for sale. A low count often indicates that the intermediary isn’t that popular with buyers and sellers. In contrast, a large number of listings is indicative of a broker’s reputation and experience. If you want to get the best price and terms for a business, you need a broker who can present you with as many businesses as possible. The more choices you have, the better deal you will be able to negotiate.
4. Inquire about the valuation process
How does the broker estimate a business’ worth? Taking revenue, projected earnings, monthly expenses, inventory, customer base, and intangible assets into account when conducting business valuation is the sign of a good broker. Choose a broker that sets the business’s price at around 2-3x its annual profit. This should be a seller’s pre-tax earnings and what the buyer should expect to pay for the acquisition. Watch out for brokers that value brands for 10-20x their annual profit – it’s probably just a gimmick to get your attention.
5. Evaluate their legitimacy
The broker you choose should be legitimate. Unfortunately, it’s easy for a budding entrepreneur to be tempted by a company that claims to be genuine but is not. One small lapse in your judgment can have serious repercussions on your business goals and any potential deal. To assess the legitimacy of a broker, here are some things you should look out for:
- Do they have a registered company/address? Is this address verifiable in the government regulatory agency’s (SEC) database?
- Do their claims correlate with the online reviews and testimonials others have posted about their business?
- Do they have proper contact channels? If such details are missing, the broker is likely not credible.
6. Ask about fees
Make sure you understand the entire structure of the commission and fees a broker charges for their services. Whether you’re the buyer or the seller, it’s important to be on the same wavelength as the agent regarding applicable charges. Most brokers only act as intermediaries between the parties, charging both buyers and sellers to use their services. However, some do not charge any fee for buying a business that is listed in their database.
It’s worth mentioning that most reputable brokers only charge a service fee for listing and aiding the sale of a business. If you’re a seller, you will be charged a fee based on your business’ sale price and any fees applicable to the additional services you used to facilitate the transaction (such as using Escrow.com to receive payment). The broker will deduct their fees from the net proceeds generated from the sale of the business. Other fees like credit card processing fees and wire transfer charges are not included in the broker’s fee.
7. Get a feel of their customer service
Good customer service is a must when using a broker. It indicates that the broker is willing to go to lengths to answer questions and deliver an excellent experience. However, don’t just take the broker’s word for it – do a test by actually getting in touch with their support team. An easy way to do this is to ask a few questions via email. See how long they take to get back and the type of answers they give for your questions. Evaluating the answers will also give you an idea of the broker’s skills and competencies.
8. Learn how they value confidentiality
If you are selling your business, you do not want your customers or staff members to find out about the potential sale. Of course, you owe it to them to break the news, but if they find it out through a business transfer platform, this might reflect badly on your reputation. So, an important question to ask a broker is how they will keep your information confidential. Ideally, it’s best to choose a broker that only shares teaser information about your business until they see serious interest from a potential buyer.
Note: Brokers may charge a small fee for keeping other information confidential. If you work with a website broker, you opt for the service where your business name and site URL would display as “private” in their listings.
Choosing the Best Business Broker for You
If you want to save effort and time, it makes sense to work with a business broker. However, the decision is only justified when you select the best one. The right broker for you will depend on the type of business you’re looking to buy or sell. For example, if you’re looking to sell a local brick-and-mortar shop, farm, restaurant, or another small-to-medium sized business, chances are a broker in your city is perfect for you. You can search for local brokers by searching for “your city name + business broker” in Google.
However, it’s worth mentioning that offline businesses are having a notoriously difficult time at the moment. Due to the global economic crisis and evolving consumer preferences, gaps have popped up in shopping centers and high streets. This has led entrepreneurs and investors to consider online businesses a better, more secure source of income.
Enter Exchange Marketplace
Exchange Marketplace is a Shopify-backed website broker where entrepreneurs of all experience levels can find, buy, and sell online businesses. There are many good brokers out there, but Exchange ticks all the boxes for being a quality business broker. For one, it has a large database of businesses and plenty of buyers (the platform registers 1,300+ new buyers per day) checking out the platform.
If you’re a buyer, Exchange can help you identify profitable businesses for sale at no cost. You can analyze the profit and loss statement of a business, contact a seller directly within the listing, and pay through Escrow.com once you agree on the price. The platform also removes the risk that a seller may have modified their figures to show inflated traffic and sales – Exchange calculates traffic and revenue data for the seller once they put their business on the platform. Sellers don’t have a way to change these numbers.
Exchange is also the fastest-growing marketplace for entrepreneurs using the sale of their business as an exit strategy. It has access to a large pool of qualified buyers who are interested in owning an online business. The average time to receive an offer is just seven days, and all payments go through Escrow.com to ensure a secure transaction for the seller.
What’s more, Exchange uses various marketing strategies to give exposure to its listings, including sending out newsletters featuring different businesses for sale to the 400,000+ contacts in its mailing list.
So, if you’re looking for an intermediary that can simplify the buying or selling process and make things more accessible for you, Exchange won’t leave you disappointed. And since it’s a premier website broker, it can move businesses faster than local and general brokers dealing with online business transfers.
Buying or selling a business isn’t easy, but it also doesn’t have to be daunting. With a reliable broker on your side, you should be able to secure the best deal possible. As with other brokers who offer significant value to their clients, a business broker offers various benefits to those willing to sell or own a business. Instead of doing due diligence and negotiating deals on your own, a broker can arrange a business transfer way quicker in a way that satisfies all parties.