Business Brokers Law and Legal Definition
Business brokers act as intermediaries between buyers and sellers of a business. They may represent either party in the transaction. They do not take possession of goods or property or deal on their own account.
Brokers differ from dealers in that the latter transact on their own account and may have a vested interest in the transaction. Brokers fill the important marketing function of bringing buyers and sellers together and helping them negotiate mutually beneficial agreements. In addition, they facilitate transactions by providing expertise and advice. As Richie Lowe Areinz points out succinctly in NZ Business, "[B]usiness brokers generally sell an intangible, such as the expected profits or in some cases the losses of a business. Real estate agents sell bricks and mortar. Put another way, agents sell land and buildings while business brokers usually sell an entity or business activity leasing space within a building."
Brokers supply numerous benefits to both buyers and sellers. Sellers benefit because they do not have to spend time and money searching for buyers. Qualified brokers have access to people in the market to purchase a company; they know how to attract and screen potential buyers much more quickly than do typical business owners. The broker may also be able to help the seller place value on his enterprise accurately; he or she can devise a strategy to transfer ownership over time, address necessary paperwork, and overcome legal hurdles related to taxes.
The buyer also benefits. A broker may be able to find a business that suits the buyer's abilities, wants, and financial situation much more quickly. Moreover, good business brokers will not accept overpriced properties, those based on illegal activities, or businesses otherwise fatally flawed. They save buyers the legwork of qualifying prospects. A good brokerage firm typically turns down as many as half of the businesses offered it for sale. In addition to screening, the broker can help the buyer determine what he or she can afford and may be able to assist in arranging financing to purchase the business. And, as with sellers, business brokers can provide help with licenses, permits, and other paperwork. In addition, it is the broker's duty to ensure that the interests of the buyer (and the seller) are protected by any contracts or agreements relating to the sale.
All of these services can be of great value to business buyers and sellers, but perhaps none is as valuable as the broker's status as a buffer between the two sides. The skilled business broker will diplomatically field and address sensitive questions and concerns that, were they delivered directly between the buyer and seller, might damage or ruin the prospects for completing a deal. Brokers that can address the concerns of one side without ruffling the feathers of the other are invaluable to the negotiating process.
For their services, brokers typically receive in compensation a percentage of the total value of the transaction. The fee may be paid by the buyer, seller, or both parties, depending on the nature of the transaction. Commissions vary widely, usually depending on the size of the transaction and the level of service provided by the broker.
THE BROKERAGE PROCESS
Although it is a broker's chief function, bringing buyer and seller together is often the easiest part of his/her job. Closing the transaction, however, is often a complicated process, colored by a spectrum of factors that are unique to each situation. For instance, the seller of a business often views the enterprise as his or her "baby," and subsequently places a value on it that may be greater than its actual worth. Similarly, a buyer may fail to appreciate the amount of work involved in building a business to a certain point. Other major factors that can complicate an agent's task include financing, which can become very complicated, and problems related to employees and/or clients of the business being sold.
As Susan Pravda and Gabor Garai observed in Mergers and Acquisitions, the process of securing an agreement typically is a multi-faceted one. Once a business broker brings an interested buyer and seller together, he or she often attempts to set a target date for completion of the transaction. This is usually accomplished by means of a letter of intent in which the buyer and seller agree to move toward a deal. The importance of the letter of intent is that it serves as a framework around which to structure negotiations. The letter also reduces ambiguity and misunderstanding, and ensures that both parties are serious about pursuing the transaction. Finally, establishing a deadline through a letter of intent helps to keep the buyer and seller focused on the big issues, rather than on minor details that can drag the deal out for months on end or kill the sale.
After setting a target date, the broker's next task is to close the price gap between what the seller wants and what the buyer is offering to pay. A wide range of considerations have to be taken into account here, including value of inventory, value of accounts receivables, value of community goodwill, inclusion or exclusion of equipment in final purchase price, tax issues for both buyer and seller, etc. Another possible obstacle to a sale that often crops up around this time is "seller's remorse." Seller's remorse commonly occurs during the latter stages of negotiations, when the seller suddenly realizes that he/she is relinquishing control of the company that has been a cornerstone of his/her life (and often the life of his/her entire family) for many years. Seller's remorse can kill the deal if the broker fails to confront it early in the negotiations by assuaging the seller's concerns.
After the framework for an agreement has been reached, the business brokering process moves on to due diligence, wherein various legal technicalities which could thwart an otherwise legal arrangement are identified and addressed. For example, the buyer might want to ensure that he or she was procuring the legal rights to all patents held by the firm. It is the broker's job to facilitate due diligence to protect parties on both sides of the deal.
In the final stage, the broker helps the buyer and seller iron out and sign a final contract. This stage is the one most likely to entail the use of attorneys on both sides, even for smaller transactions. The best way for the broker to reduce the chance that the deal will fail at this critical juncture is to try to address all questions and concerns in the letter of intent and due diligence stages. Despite his best efforts, one or both parties may employ brinkmanship tactics that threaten to scrap the entire deal, such as significantly raising the asking price or demanding that some new contingency be added to the agreement. At this point, the broker's expertise as mediator and peacemaker is key to ensuring that the transaction goes through.
BUSINESS BROKERS AND THE ENTREPRENEUR
Business brokers can be invaluable to both buyers and sellers of small businesses, but the quality of these agents can vary tremendously. Business brokerage firms have traditionally been a notoriously unregulated group, and while there have been some improvements in this regard in recent years, complaints about incompetence and/or questionable business practices still crop up. Whether an entrepreneur is looking to start a business through a purchase or sell an existing business to start on a new idea, it is essential that he/she take steps to ensure that the services of a skilled and qualified broker have been secured.
There are, of course, certain basic kinds of information that any buyer or seller should obtain when shopping for a business broker. "When you're looking for a broker to help you buy or sell a business, ask about the broker's level of experience and pursuit of continuing education," counseled Nation's Business. "When getting references, ask for the names of not only buyers and sellers but also attorneys, accountants, and commercial bankers." Another basic aspect of an agent's operation that should be checked is its exclusivity policy (some brokers will list businesses only if they can do so exclusively, a requirement that limits the business's visibility). But there are other steps that can be taken as well. For example, a broker's record of sales as a proportion of total listings can provide significant insight into his or her abilities. Brokers who are unable to deliver sales on more than 50% of listings on the market for six months to a year should probably be avoided. Not surprisingly, a broker who can document a successful track record of sales to listings is preferable to one who can not.
Other recommendations that Pratt gave to Inc. included the following:
- Determine how often the broker's listing price corresponds to the eventual sales price—"I'd be much more favorably inclined to work with a brokerage if its average selling price is within at least 20% of the average listing price," remarked Pratt.
- Inquire about the broker's affiliation with highly regarded industry groups, like the International Business Brokers Association, which maintains rigid standards for its members.
- Inquire whether the broker specializes in specific geographic regions or industries—A broker who has primarily dealt with manufacturing firms may not be the best choice to help a business owner sell his or her restaurant.
- Look for tell-tale signs of unethical or incompetent behavior—Does the broker accept bogus listings (those that are listed at ridiculously inflated prices or owned by owners uncertain of their desire to sell)? Has the agent prematurely leaked private information about your company to potential buyers? Is the broker favorably adjusting a company's income statement to an excessive degree? Unfortunately, these signs often become apparent only after a buyer or seller has established a relationship with the agent. In such cases, business experts counsel entrepreneurs to sever all ties and move on to another broker or method of purchase/sale.
Areinz, Richie Low. "Business Brokers Know the Ropes." NZ Business August 2005.
Bianchi, Alessandra. "The American Dream Revisited: Why You Won't Sell Your Business," Inc. August 1992.
Coleman, Bob. Guide to Business Start-Ups. Entrepreneur Magazine Group, 1993.
Garai, Gabor, and Susan Pravda. "The Critical Line Between Dealmakers and Deal Breakers." Mergers and Acquisitions. March/April 1994.
Maynard, Roberta. "Business Brokers." Nation's Business. July 1997.
Rosenbloom, Joe, III. "Brokers for Hire." Inc. March 1987.
Hillstrom, Northern Lights
updated by Magee, ECDI
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