Don't Miss These Business Broker Red Flags

For many entrepreneurs, selling their business for a few million dollars can be a life-changing event. Yet, too often, their expectations of a quick and easy exit end in disappointment. In most cases, when selling a business for less than $5M an owner's best option is to engage with a local business broker. Unfortunately, when business brokerage red flags are ignored, the likelihood of an underwhelming transaction experience increases exponentially.

What is a Business Broker?

Business brokers are trained specialists focused on business transfers. A business broker can be either an individual, or a firm specializing in servicing smaller business transactions. Their main role is to assist in the buying or selling of a privately held company, typically a small or main-street business. Business owners will typically lean on a broker to support them through many aspects of the sales process including valuing the company, marketing the business to potential buyers, managing the due diligence process, and negotiating deal points with potential buyers.

How can a Business Broker help sell my business?

Before you decide that hiring a business broker is right for you, let’s highlight the primary reasons that business owners find sales success with the assistance of a business broker:

1) Help create professional marketing materials to ensure your business is presented in a format that investors and buyers like to see

2) Identify a realistic valuation range based on industry, region, and initial confidential conversations with potential buyers

3) Bring tools, resources, and relationships that make finding a potential buyer much quicker than if you were to do it yourself

4) Identify challenges with the business and provide addressable actions to make your business more attractive to buyers

5) Conduct buyer screening, deal negotiation, and due diligence with buyers

6) Create competitive tension among buyers to ensure you are getting the best possible sale price and transaction structure for your business

Overall, having a business broker allows this process to run as smoothly as possible and be completed in less time than if you were to try to sell your business on your own.

Business Broker Red Flags

While there are many advantages to using a business broker, it is important to understand that not all brokers are created equal. Below are some of the biggest red flags you should watch out for when considering a business broker relationship:

1) The broker is letting you drive the valuation discussion - an experienced broker should always be able to derive a valuation range based on their own research, relationships and industry experience. If you find a broker that asks for your opinion and then sticks with it, they may not have the needed experience to successfully support your sales process.

2) Limited available referrals - in any line of work, you should be concerned when the prospective business has very few references to offer. If this is the case, ensure you completely understand the background of each business broker and his or her historical success before entering into an agreement.

3) Lack of professional licenses - in nearly half of the United States, business brokers are required to have a real estate license to sell a business. If your state requires one, it’s important that you find a business broker that meets this requirement.

4) Unrealistic timing expectations - even the most straightforward business acquisitions take time. Any broker that promises to close the sale in a matter of “days or weeks” is unlikely your best partner.

5) Significant upfront fees - most business brokers will charge a success fee on the sale of your business. Many brokers will also require a retainer paid up front or on some negotiated timetable. Be wary of any business broker that demands a significant portion of their fees prior to the actual sale.

6) Substandard marketing materials - although there are exceptions to this rule, you’ll want to ensure that the business broker’s marketing materials are of high quality and send the professional message that reflects well on your business. Low-quality marketing materials will limit the number of buyers interested in your business and therefore greatly reduce the likelihood of a successful sale.

Frequently Asked Questions

Where do I find a reputable business broker?

Finding business brokers in your local market shouldn't be a problem - and a simple online search will likely return ample listings of available brokers or brokerages. As discussed in this article, finding the "right" broker is much more difficult. Leaning on close, trusted, personal and professional relationships for a referral is typically the best place to start. Once you identify a list of potential brokers, it is best to lean on public reviews, customer testimonials, and consider brokers with alignment with your trusted professional organizations.

How does a business broker make money?

Business brokers traditionally charge a success fee or commission on the sale of a business. Average broker commissions range from 3% to 10% of the sale price. Business brokers also often charge an upfront retainer in the range of $15k - $30K. All fees are often negotiable.

Todd Sullivan.
Todd Sullivan

Todd graduated from Yale University where he was a 2-time MVP of Yale’s ice hockey team. After a year as a minor league hockey player in the San Jose Sharks and Toronto Maple Leafs organizations, Todd returned to school for his MBA at the University of Michigan where he graduated as Entrepreneur of the Year. Todd went on to build and sell four companies over the next 25 years with offices in Boston, San Francisco, Chicago, New York and Detroit. After the sale of his last business in 2015, Todd has dedicated his time to educating his fellow founders about the M&A process and helping many of them maximize the sale of their businesses.

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