Business Broker…a WHAT?




Everyone has heard of Brokers – Stock Brokers, Mortgage Brokers, even Marriage Brokers. But what is a Business Broker? It is a little known and less understood segment of the Real Estate industry. Simply put, a Business Broker is one who assists an individual (or company) in buying a business or helping a company sell their business – in concept not too different from a residential Real Estate Agent in the housing market. However, that is about the end of the similarity.

A FEW STATISTICS

There are about 25 million businesses in the United States. The vast majority have no employees – Real Estate salespeople, consultants, nannies, etc. Discounting these, there are about 5.6 million of which 20% are for sale at any one time. Ninety percent of these are offered “for sale by owner” – FSBO’s. Notwithstanding, over 50% of the businesses that sell are sold through Business Brokers according to the U. S. Department of Labor and the SBA.

BUILD vs. BUY

Every year, thousands of people consider entrepreneurship. The two routes are either to buy an existing business or start one from scratch. Each course has advantages and disadvantages that one should consider.

Starting your own business can be very rewarding but needs to have a unique product, technology, or service. Let’s face it, there are very few “new ideas” out there that have not already been tried. One would need to complete a thorough evaluation of the marketplace, competition, need – in other words a Business Plan. If you start your own business, you will not be paying for Goodwill or Bluesky. Perhaps you can start from your home with no employees and greatly reduce the initial capital requirement.

However, you will need to support yourself (and family) from personal savings. There may be months or years before profits are sufficient to provide the level of income needed. Obtaining financing may be very difficult as there is no track record and no customers. The chances of survival of a start-up business is low – a 75% failure rate according to the Bureau of Labor Statistics.

Buying an existing business may be a more efficient way to business ownership, but it is frequently more costly. Existing business owners will expect a premium for providing you with an existing customer base and location. The advantages of buying an existing business generally outweigh the disadvantages. Existing businesses can normally obtain financing from financial institutions because they have established history, assets, and a proven idea. The seller will quite often provide a portion of the financing in the form of a loan.

Established businesses are less risky because they have an existing customer base, relationships with suppliers, an operating process, a known location, and employees that are hired and trained. In addition, there is an existing cash flow which can provide immediate income to the buyer. Experts generally agree, in most cases, that paying the extra cost for an existing business will outweigh the risks of starting one from scratch.

SELLING YOUR BUSINESS

Whereas in residential Real Estate, you want everyone to know your home is for sale to accomplish the greatest exposure, rarely does an owner want anyone to know his business is for sale. Realtors deal in number of bedrooms and baths, square footage and schools. Business Brokers deal in Revenue, Cost of Goods Sold, expenses, Inventory and overall business valuations, recasting, Income Tax returns, Profit and Loss Statements, leases, etc. A business sale must be conducted in the strictest confidence to protect the ongoing viability of the business. If word gets out that a business is for sale, employees flee, competitors pounce, suppliers fret and the entire future of the business can be in jeopardy. How many “Business For Sale” signs have you ever seen? Additionally, businesses are valued on the basis of their cash flow and thus the value of the business may decline as the attention of the owner is focused on the sale.

In residential sales, the house and the land serve as the collateral that allows the buyer to obtain traditional financing. In a business, much of the value is in the intangible goodwill. Banks are left with very little to foreclose upon should the business fail under a new owner. For that reason, owner financing is a major issue in business sale transactions. The seller, therefore, has a tremendous stake in knowing the buyer – not just in the buyer’s ability to operate the business, but his reputation and personal financial condition. Too often, an owner will find that he has been misled by a buyer who subsequently ruins the business and jeopardizes the ultimate repayment of the loan.

THE SOLUTION

In so many cases, an owner will pursue a FSBO route to a sale of his business in an effort to avoid paying a commission to a Business Broker. The short term reality of the payment of a commission is overshadowed by the benefits of having a seasoned veteran of business sales working with him. Using a Business Broker can actually increase the cash that remains in a seller’s pocket following the sale. A good Broker will work in the best interest of both buyer and seller throughout the transaction, understands the many pitfalls inherent in business transactions, maintains confidentiality throughout the process, qualifies buyers for reputation and financial capability, assists in structuring the various financial options available, and allows for the owner to do what he does best – run his business.

Considering the pros and cons, the stakes in the transaction are too high to proceed without competent representation. While a FSBO can make sense in a residential transaction, it seldom pays dividends in a business sale.

One Response to “Business Broker…a WHAT?”

  1. Business Broker: Ontario Says:

    This is a great article for our profession — I am going to refer my potential clients to this post so that they will get a good sense of things.

    Thank!

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