Do you remember how you started working with your CPA, lawyer or banker, or how you hired your most valuable employee? You probably made the decision thoughtfully and carefully after considering numerous options. Selecting a partner to help sell your business is no different. Choosing representation as you prepare to sell your company is one of the most important business decisions you will make. So how do you go about it?
Here are 11 questions that we recommend that you ask business brokers who offer to help you sell your business:
- How many businesses have you sold?
- Do you have an office?
- Do you have multiple brokers and agents in your office?
- How will you protect my confidentiality during this process?
- How will you go about valuing my business and determining the selling price?
- What marketing methods will you use to target potential buyers for my business?
- How do you keep from wasting my time with unqualified buyers?
- Will I have to finance any portion of the sale?
- What are your fees?
- How long will it take to sell my business and what are the terms of the listing agreement?
How many businesses have you sold?
In asking this question, you want to determine how active this brokerage company is in the marketing and closing in the sale of businesses it represents. It’s smart to choose representation with more general experience over a broker with less experience, even if that experience is in your particular industry. Some transactions involve large dollar amounts and are very complicated; a good business intermediary team may only handle a few closings at that level per year. On the other hand, if the team primarily represents small Main Street companies that sell in the range of $150,000 to $250,000, you should expect that they will handle at least 15 closings annually. For example, VR Business Brokers has sold more than 100,000 businesses. If you expect your business to sell for more than $500,000, then that independent broker who has never closed a deal over $150,000 isn’t going to be right for you. Due to the complexity of most business sales, even small ones, you are better off retaining a team of professionals who will work synergistically and who have experience in closing deals in all ranges so that you benefit from their experience. The last thing you want is for a situation to emerge that your team has never dealt with before due to a lack of experience. Some experienced teams charge slightly higher fees, yet their level of sophistication, experience and services easily make up for it by getting the deal done at a higher selling price for your company.
Do you have an office?
You may be surprised that you’d even need to ask this question. But the reality is that many business brokers do not have their own office. They work from an executive suite or worse, their home or a coffee shop and a laptop. You don’t want to turn over the sale of your business, which often represents your greatest single asset and the key to your family’s financial future, to someone who can't even afford a full-time office and staff. What kind of impression does this leave on a prospective buyer? What kind of offer will they make for your business? If a business broker works from home, how will the broker present your tax returns and other confidential information critical to your success? Many brokers don’t hesitate to fax or email your financial information to prospective purchasers without protecting your confidentiality. Do you want your most confidential documents faxed or emailed across the country to buyers or, worse yet, to your competitors? At VR Business Brokers of Fort Worth/Arlington we have designed our office space to be used exclusively as a due-diligence conference room. We don’t send confidential information until after we have a firm agreement from a prospective buyer in place, along with earnest money.
Do you have multiple brokers and agents in your office?
Why settle for just one business broker? An office with multiple agents allows your broker to take advantage of the knowledge, contacts and expertise of fellow brokers to deliver the best possible deal for your business. Your broker can consult with fellow brokers on various strategies or facets of the sale, along with the managers of VR Business Brokers of Fort Worth/Arlington. The synergy of our multiple-associate office is a powerful combination that results in you pocketing more money faster than any single-broker office can offer.
How will you protect my confidentiality in this whole process?
Many business owners are very apprehensive, with good reason, about people discovering that their business is for sale. Your team of professional intermediaries must be committed to maintaining your confidentiality. In fact, maintaining the confidentiality of the sale is one of the hardest things to do when selling an operating business. Although no reputable intermediary can ever guarantee complete confidentiality, your intermediary team can take steps to increase the chances that confidentiality will be maintained. The most important step your brokerage firm can take is to tour and show the business properly and discreetly to buyers. Your team of professional intermediaries must be willing to personally escort buyers and show the premises after normal business hours or will be willing to pose as a banker or some other professional having legitimate interest in touring the business during normal hours. Employees, clients, dealers, customers and competitors can easily destroy a transaction if they find out your business is for sale. Your professional intermediary team also must:
· Use discretion in any details included in the marketing or advertising of your business.
· Require that confidentiality agreements be signed prior to releasing any detail about the sale. These legally binding agreements, signed by potential buyers, require that they do not disclose any details they may learn about your business or even that it is for sale. Your professional team of business intermediaries should use a specifically designed confidentiality agreement with potential buyers. This agreement form should have a proven track record. An off-the-shelf confidentiality agreement will not offer you adequate protection, should it need to be enforced.
How will you go about valuing my business and determining the selling price?
Professionals and business owners alike use four approaches to putting a dollar value on what a business is worth. These four methods include the Market Approach, the Asset Approach, the Income Approach and the Excess Earnings Method. Visit our Professional Valuation Services pages for detailed descriptions of each method. The following is a brief overview:
· The Market Approach utilizes information from similar companies that have been sold in recent years to set the value of your business.
· Under the Asset Approach, your company is valued by adding up the value of its individual assets as well as its goodwill value.
· With the Income Approach, the business is valued by calculating the present value of its projected income or cash flow.
· The Excess Earnings Method determines the company’s net tangible assets and present goodwill separately. The two separate values are analyzed, and then added together to determine the business value.
If you are going to rely on a professional business brokerage team to help you determine your company’s value – which VR Business Brokers of Fort Worth/Arlington, strongly recommends – you’ll want to know which business evaluation method your team intends to use.
What marketing methods will you use to target potential buyers for my business?
Marketing methods are extremely important to the successful sale of the business. VR Business Brokers of Fort Worth/Arlington uses a wide range of proven marketing tools. If you ask your prospective intermediary about marketing efforts, and the reply is simply a list of advertising venues, odds are that this broker will not serve you well. Instead, your team of skillful and experienced intermediaries should discuss a targeted marketing plan for your business. This marketing plan should begin with the presentation of your company’s information in a well-developed offering statement or package. The most experienced intermediaries have a substantial backlog of potential buyers who they can present your business to without ever having to expose your business to the general marketplace.
VR Business Brokers, as the industry’s most established intermediaries, has extensive business community contacts that we use to discreetly seek a potential buyer without having to advertise. When direct advertising is appropriate for your business, we use sophisticated advertising in local periodicals, broker newsletters, and the internet. You don’t want to be represented by someone whose primary method of marketing is advertising without serious safeguards to maintain your privacy. Often the biggest challenge for buyers, sellers, and brokers of small businesses is to efficiently find each other and close the deal. Many would-be business buyers are willing to relocate to anywhere in the country for the right opportunity. Many businesses themselves are not geographic specific and can be relocated to the buyer’s area. Small local or out-of-state brokers lack the necessary resources to easily connect with the wealth of potential buyers outside of the region. Often their only tool consists of internet listings, which compromise your level of confidentiality. With more than 170 offices in USA and six other countries, your VR team offers the best and most confidential solution. We take advantage of inter-network advertising and other marketing methods to securely attract your buyer from any state and many countries.
How do you keep from wasting my time with unqualified buyers?
A qualified prospective buyer is someone who is ready, willing and able to buy a business such as yours. The qualified buyer is honestly looking for a business to purchase, has the motivation and personal commitment to purchase a business, and has the financial resources or access to them to consummate the purchase. At VR Business Brokers of Fort Worth/Arlington our professional business intermediaries use a series of questionnaires such a buyer’s financial qualification statement to qualify the buyer. We are skilled at sorting through the many non-qualified buyers to get to the few potential buyers with the means and motivation to buy your business. We know the current financing qualifications that the buyer must be able to meet. After the unqualified buyers are sorted out, a very high percentage of the qualified buyers actually do buy a business. We offer buyers a training class to educate them on how to buy your business and what to expect along the way. This often prevents last-minute misunderstandings that can kill the deal and waste everyone’s time and resources.
Will I need to finance any portion of the sale?
In the current tight credit market and today’s economy, the seller typically finances a part of the transaction to complete the sale of the business. We understand that most sellers just want to sell their business and be done with it. Unfortunately, it often doesn't work like that. Unless your business is extremely profitable, is very well established, has a strong consistent financial performance, and has a loyal customer base in a growing market, most banks and other lending institutions will only lend a portion of the business value to the buyer. This is especially true if a significant portion of the business value is in goodwill. Recently, some leading institutions have begun to lend no more than 70 percent of the fair market value of the tangible assets. They won't loan any portion of the goodwill value of the business at all. So, unless the buyer has the entire amount of the purchase price in cash, you might want to think about how much and under what conditions you will take back a promissory note against the sale of your business.
Historically, most sales of closely held businesses have been primarily financed by the seller. Unless you are selling to another company with substantial credit facilities, most business buyers don't have the entire amount of the business selling price in cash. Remember that there are many other demands for the buyer’s money at the time of transfer of ownership such as professional advisor fees, transfer taxes and related expenses, and operating cash requirements. The buyer will also want to hold a certain amount of ready cash in reserve to cover any unexpected expenditures and contingencies. Even a buyer who has the available cash at his or her disposal or who can obtain outside financing will usually want to see a continued financial involvement on the seller’s part. This gives the buyer confidence that the sales and profitability claims made by the seller are all true.
In addition, it can be very difficult to obtain third-party financing for the sale of an operating business. Commercial banks, venture capitalists and other sources of funds are leery of financing a transaction of this nature because of the many things that can go wrong under a new owner. Most of the potential problems are extremely difficult to evaluate before the sale of the business. Accordingly, any outside financing might carry such a high interest rate to cover the potential risks that the debt load may make the purchase impossible. In providing financing for the buyer, a seller will usually receive the highest price for the business because the seller can provide the best terms. The seller has a great deal more latitude in selecting the interest rate and a payoff period than a conventional lender. Consequently, the seller will be better able to ensure that a successful sale of a business takes place at the highest reasonable price.
Bank financing for business sales only became common in the early 1990s. If your broker has been in business for less than 20 years, their experience with structuring the transaction in the current seller-financed economy will be limited. Who pays for this inexperience? You. Because VR Business Brokers and our staff have worked in this industry since 1982, we are the most experienced business representation you can work with. We have closed thousands of seller-financed transactions. We also have alternate sources of financing that can be made available to qualified buyers as well as good contacts for sources of capital from SBA-participating banks or venture capital funds. For more information on the variety of available funding options, see our Financing Options page.
What are your fees?
Many business intermediaries charge a standard fee. This fee usually is a set percentage of the total business sale value up to a set value. After this set value, the percentage declines on a scale known as the Leymans Scale. Often, the total business value includes tangible assets such as accounts receivable and inventory as well as intangible assets such as goodwill. A typical business arrangement for a business intermediary may have a set percentage for all businesses valued up to $2 million, followed by a lower percentage for the next million dollars in value. The intermediary’s fees might continue with a lower percentage for every $1 million in value up to the lowest percentage for anything over $10 million in value. The most important thing to remember when evaluating your chosen professional's fee structure is that lower percentages don't always equate to a lower cost of the sale. For instance, when a professional intermediary who knows how to properly package and market your business to a qualified audience can secure a higher selling price, that more than makes up for the difference in a few percentage points.
How long will it take to sell my business and what are the terms of the listing agreement?
Basically, there are three types of listing agreements or authorizations to sell your business that you can enter into:
· The open agency listing gives the broker the right to sell the business but without any specified performance requirements for either the seller or the broker. The sellers still have the right to sell the business themselves and also the right to enter into other open listing agreements with other brokers. The broker, in turn, does not have any obligation to exert any effort in marketing that business. In general, open listings are the least desirable to the broker. In fact, brokers will avoid these listings if possible because they compete with too many other parties, including the seller. The broker could do a fine job with marketing a business and then lose a commission because another broker or the owner sells the business first. Without an exclusive right to sell, the seller has a strong competitive advantage over the broker, which is price. The owner can sell the business for less without a broker's commission. Brokers may decide to accept an open listing on a business if they feel the price terms and some other conditions will make the business very hard to sell and if they do not want to spend much time or money marketing it. A typical seller problem with an open listing scenario is that it is virtually impossible to keep matters confidential. If there is any concern along the lines of confidentiality, this is not the way to go. Additionally, no serious intermediary who is planning to aggressively market your company would agree to an open listing. The only reason they might entertain it is to have the business as part of their on-the-shelf inventory in case they run across a buyer who would be interested in it.
· The exclusive agency listing gives the broker the exclusive right to sell the business as an agency brokerage firm. The seller retains the right to sell the business but cannot give a listing to any other agency during the term of the agreement. The brokerage company is required to exert its full and best efforts to market that business. Although this is not the most desirable listing for all concerned, it is many times an acceptable compromise over the open listing. In general, the seller won't be able to sell the business without the broker. In most cases, the seller won't even make the attempt if there is an aggressive sales effort undertaken by the broker. However, the broker may be competing with the seller if the owner decides to actively pursue selling the business independently. Again, the seller has an advantage over the broker in that the business can be sold for less than the broker can sell it for.
With both the open agency and exclusive agency listing types, the seller may mistrust the broker to perform as promised. The seller who uses these listing types is tempted to test the waters while keeping options open. VR Business Brokers of Fort Worth/Arlington advises that if this describes your attitude toward the person you are trusting with the sale of your business, you need to look further. It is much more advantageous for the seller and the broker to work together to accomplish a sale. Any competition between the buyer and seller can actually be counterproductive.
· Finally, there is the exclusive right to sell listing. This offers the best arrangement for the business seller and the business intermediary. Most businesses that are sold are done so under exclusive right to sell agreements. This listing gives the intermediary the sole and exclusive right to sell the business. Even if the present owner sells the business, the agreed-upon commission must be paid to the intermediary. This rarely occurs, however. Marketing requirements for the intermediary are the same as for an exclusive agency and the broker must use its best efforts to sell that business. This type of listing allows intermediaries to feel much more secure in investing their time, effort, and advertising money in promoting the sale of the business without fear that the owner or anyone else will cut them out by finding another buyer. The advantage to the seller is that the best service is received from the protected, and thereby highly motivated, business intermediary. The only potential disadvantage of this type of listing is the risk the business owner takes relative to whether an agent or broker will put forth best effort. The sellers will be unable to sell the business themselves without owing the broker he commission, or to give the listing to a more qualified intermediary until the term of the listing agreement has expired. The best solution to this disadvantage is to make sure at the start that you are using a professional and reputable business intermediary to represent you and your business.
Another point to consider on the subject of listing agreements is the length of time. It is unreasonable to expect to sell a business in less than six months. Twelve months are a better estimate, given the complicated nature of the transaction. Therefore, the most qualified intermediary is being reasonable in expecting a one-year term for both parties.
In our view, these are the 11 most important questions business sellers should ask before trusting an intermediary with the sale of their business. These questions give you a good starting point from which to interview a potential representative or advisor. However, these questions and related answers and discussion are no substitute for more extensive information and professional advice on this critical and complicated topic. VR Business Brokers of Fort Worth/Arlington encourages anyone considering the sale of his or her business to seek competent legal and accounting advice during all phases of the business sale process. It’s advisable for you to read and listen to as much as you can about the process. It’s also a good idea for you to learn how you can effectively help your professional team of business intermediaries sell your business for top dollar.
Specializing in privately owned and closely held mid-market companies; our experienced team of highly trained intermediaries powerfully represents you throughout a merger, acquisition or divestiture process. As your advocate, we provide a discreet consultative approach, unrivaled in the industry, to each and every business transaction. Because our team includes seasoned and experienced professionals who receive ongoing training, each of our intermediaries can bring you the same level of service and professional resources that a much larger company would receive from the finest top-tier investment bank. We invite you to contact us to learn why VR has sold more businesses in the world than anyone, and more importantly, how we can help you.