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Hiring A Business Broker? Ask These Questions First, Then Decide

Are you considering using a business broker or agent to sell your business? Consider these critical factors before hiring one. Selling a small business in any economic environment can be profitable and risky at the same time. For most business owners/sellers, there are two options: sell the business yourself or hire a broker (or agent) to do it for you. On the surface, selling a small business on your own might seem like a great idea - but for most business owners, hiring a third party is the way to go when you consider the time it takes qualifying potential buyers, preparing legal documents, and various other nuances of selling a small business.

To maximize your selling price, deal structure and chances of success - consider the data points and questions below before hiring a broker or agent to sell your small business:

How Much Related Experience Do They Have With Your Type Of Business?

Here's why you must ask this question: selling a website is different than selling a restaurant. The key is to select a business broker or agent who has sold businesses similar to yours. This will save you considerable time and money. An intermediary without any documented success in selling businesses similar to yours means that the broker will have to spend time learning the ins and outs of your business type and nuances. This also means that the inexperienced broker will not have immediate access to potential buyers, lessening your chances of selling your small business.

Does The Business Broker (Or Agent) Sell Businesses Full Time Or Part Time?

It's important to know whether the person you are hiring to sell your most important asset is also dabling in running a liquor store in addition to selling small businesses. You'll want an intermediary who has a track record, is a true professional at what they do, and treats their work as a professional practice not a side gig to make additional monthly income. Hiring a broker who works another job means that he or she is limited in the amount of time they can devote to selling your business. This puts you at a disadvantage.

Do They Work At Home Or In An Office?

This question empowers you with invaluable insight into the broker you're considering. Since you're hiring a third-party, the broker you select represents you to potential buyers. There's nothing wrong with working from home - in fact, it is increasingly becoming the new normal. However, meeting potential buyers at a Starbucks to discuss selling your business doesn’t represent your business in the best light. An additional check is to ask if he or she is certified. Do they have any professional designations from any local or national business broker associations?

How Many Small Businesses Like Yours Have They Sold?

It is important not to confuse the business "type" with a business like yours. For example, a small diner that seats a maximum of 20 people and a fine dining restaurant that seats 250 people can both be classified as the same type - both are restaurants. However, there is a difference in successfully selling a fine dining restaurant and a small mom and pops establishment. For starters, a broker with experience selling a business like yours will already have a list of potential buyers to call upon. The type of buyers interested in purchasing a fine dining restaurant will be different than the set of potential buyers searching for a small mom and pops shop.

How Do They Value A Small Business, What Deal Structures Do They Suggest?

A business broker or agent that says, "net income multiplied by two" and leaves at that is your signal that it's time to move on to the next potential broker. Here's why: every small business is different. An experienced broker will spend more time asking you questions about your business before they provide an answer. Valuation calculations involve a variety of factors, meaning that one cookie-cutter formula will not work for every business. Most small businesses are valued by the seller discretionary earnings (SDE) - that means net profits added to expenses, which in turn benefits the owner(s), but not necessarily the business. In addition to asking in-depth questions about your business to truly understand your business, an experienced broker will also explain how the SDE contributes to the overall valuation of your business.

How Many Qualified Buyers Do They Have In Their Database For Your Type Of Business?

A broker that claims to have thousands of qualified buyers is a sure sign that the broker doesn't have what you're looking for. In reality, what this means in most cases, is that the broker has a generic email list that he or she uses. What you're looking for in a broker is someone who has built relationships with the type of buyer that's right for your business. The last thing you want is to hire a broker who simply fires off emails to a list of people who more than likely are not interested in buying your business.

This practice also opens you up to another disadvantage: not being discreet. Selling a small business can be a complicated process. You want to avoid the possibility of alerting your customers that you’re trying to sell your business. This can further complicate the process. When customers discover that your business is for sale, in their mind, it seems like trouble, which leads to questions and other unwanted attention.

An experienced broker who has successfully sold businesses like yours can keep the process discreet and usually has relationships with several dozen potential buyers for your type of business. This in itself gives you more value and increases your chances of selling your business for the most profit and as discreet as possible. Confidentiality in most situations is key to a smooth selling process.

Do They Co-Broker With Other Brokers And Agents On All Of Their Listings?

One of the keys to selling your business is to have as many potential buyers while being as discreet as possible. Co-brokering simply means that the broker you choose will split the commission with any buyer's broker who brings a buyer to the closing table. For example, a ten percent commission would be split, giving five percent to your broker and five percent to the buyer's broker. This gives you a leg up and a lot more chances of selling.

Here's why: Most buyers are represented by a buyer's broker. However, buyers generally don't pay a fee to their broker. However, if the broker you select co-brokers, the buyer's broker will be motivated to bring their buyer to a listing that pays a commission. Buyer brokers will generally avoid listings that do not offer a commission, which means less traffic for your listing and decreases your chances of selling your business.

So why wouldn’t a broker not want to co-broker? It’s because the broker wants to keep the full commission to themselves. However, this is not the best deal for you as a seller.

Remember sixty percent or more of California business brokers don't co-op with other brokers or agents - find one that will and hold them to it!

What Online Platforms And Marketing Sources Do They Utilize & Why?

The last thing you want when you go to market is a cheap business broker or agent. Many brokers and agents have very low budgets for advertising and marketing. Make sure they will spend at least $400 to $2000 for a comprehensive, ongoing campaign to find qualified, serious buyers. Find out what online platforms they will be utilizing, trade publications and portals, will they be marketing your business to other like businesses in your industry (strategic buyers) or strictly to individuals (financial buyers). Make sure they have a comprehensive, long range plan for promoting your business for sale.

How Often Should You Expect Updates And What Format Will They Be In?

Be sure to ask the broker if he or she will provide weekly follow-up reports? These reports will help keep you in the loop of things throughout the process. If the broker doesn't provide any feedback or reports - walk out of the meeting now. Part of operating a professional practice is keeping a client informed on the process at hand - if your broker can't give you updates they probably aren't getting results. Remember only twenty to thirty percent of all small businesses are actually sold in California (there are many reasons for this - many of which we cover in our blog posts, podcasts, or webinars).

What Should You Be Doing While The Broker Is Doing Their Thing?

One of the biggest mistakes that small business owners in California make when trying to sell their business is to think that the business broker they hired will do all of the work. Although you've hired someone to help sell your business, it is extremely important to remember that you are still the best salesperson of your business. No one knows your business as you do, no one is more passionate about your business, and no one will be as motivated. Make sure the broker only brings "qualified" buyers to "seller meet and greets" and ask as many questions to potential buyers and answer buyer questions succinctly and honestly without going on and on - keep it brief and professional.

Also during the sale of your business keep your company operating smoothly (keep your eye on the ball as they say), don't neglect customers or the bottomline just because you're selling your business and will be gone soon. If your financials (numbers) start dropping it makes selling a business much more difficult to sell (if at all).

Can They Provide a Sample Listing, Online Format Of Past Listings?

This gives you real-time insight into how your listing may look to potential buyers. Listing a business for sale is just one part of the whole equation. It must look professional and complete to get the attention of serious potential buyers. You may be surprised at the amount of poorly written listings by brokers and agents (remember sixty percent or more of all California businesses for sale listed by brokers and agents never end up selling).

When it comes to selling a business, presentation is crucial. As the adage goes, "first impressions make lasting impressions." Needless to say that your business needs to have the best possible first impression, and the way your business is listed can make or break your chances of attracting the right buyer.

Knowing What Your Business Is Really Worth (And Potential Deal Structures) Is Critical

This step empowers you with a true sense of what your business is worth before hiring a broker or agent. It is important to know the business broker's valuation process and it is equally important that you as the seller get a non-biased small business valuation. Many business owner/sellers get a professional market business appraisal as part of the BizBen ProSell Program before they sign with a business broker to make sure they know what they should be asking (price) before they head to market and work with interested buyers. The first thirty to forty-five days in the selling process is critical - you want to make sure you have your business priced correctly (and workable deal structures that work for both you and potential buyers).

About the Author: Peter Siegel, MBA is the Founder & Lead Advisor at BizBen.com (established 1994 - 8,000+ California small businesses for sale & wanted to buy postings -  with 500 new & refreshed posts daily). BizBen.com offers business buyers, owner sellers, business brokers and advisors free access to online postings, articles, blog posts, discussions, podcast, resource and broker directories, etc. Peter heads up the BizBen.com ProBuy, ProSell, & ProIntermediary Programs. Peter Siegel, MBA can be reached direct at 925-785-3118 for advice, referrals, or questions.

Categories: BizBen Blog Contributor, Business Broker Information, How To Sell A Business, Selling A Business

Contributor:

Peter Siegel, MBA
Areas Served: Nationwide - All Areas
Phone:  925-785-3118 Cell, 925-785-3118 Text
Peter Siegel, MBA - Founder Of BizBen.com (since 1994), I am the Lead Advisor for the ProSell, ProBuy, & ProIntermediary Programs. I advise/coach buyers, sellers, and brokers daily about buying & selling small to mid-sized businesses throughout the Nation. I can be reached direct at 925-785-3118.

Comments & Feedback From Pro Intermediaries & Pro Advisors On BizBen:

Posted By: William Ziprick, Transactional Attorney - Contracts, Consulting    

1. Please give me a detailed description of all of the various services you would be performing for me if I retained you?

2. Would you be still available to assist with the numerous post-closing tasks even after the sale transaction has closed?

3. If we successfully get to the purchase agreement stage of the transaction, do you provide form documents for potential use? Who has prepared these documents?

4. Have you worked on sale transactions involving the particular type of business that I am interested in selling/buying? How many? Were the sale transactions successful?


Posted By: Prabhjot Randhawa, Business Broker - SF Bay Area, Central Valley, SAC Area    

Selling a business is a very big decision and choosing the right Business Broker can make a huge difference for the seller. I have been through countless interviews with Sellers and have been asked all sorts of questions. These questions are about my past experiences with similar business transactions, how many years I have been selling businesses, and how many businesses I have sold etc. These are all good questions and Seller must get to know the Business broker's experience before signing the listing agreement, but in my opinion, there are a couple of questions that every seller should ask but very rarely comes up in an interview. Those are as follows.

How do you see this business transaction getting materialized and what is your vision towards closing this business transaction?

This question alone can cover most of the seller's questions towards the business broker's working knowledge of the business transactions. Each business is different from one another and requires a unique approach in marketing and selling, not to mention the lengthy process that goes to close a business transaction. The business broker should be able to see the finish line, and each and every step that should be taken throughout the process. For example, preparing the business to sell, marketing it to the right group of buyers and investors, getting financially approved if requires, scanning for the right buyer since there are a lot of tire kickers in the market, assisting seller and buyer with the transfer of all required licenses and permits to operate that business, educating and assisting seller and buyer throughout the escrow process, and keeping the PSA alive by following the terms and conditions of the PSA. An experienced business broker is a key to closing transaction smoothly and on time.

How will you prevent my employees, customers, vendors, and competitors from hearing my business is for sale and still create enough exposure?

Keeping the sale of a business confidential is very important. The Seller must make sure to find out what policies are in place that keeps the details of the sale confidential. If employees, customers, or vendors are made aware of the sale they might interpret it as trouble; when in reality you might be selling simply to pursue other opportunities. Additionally, you don't want competitors to catch wind that you are exploring options to sell. A great broker will be able to stir up interest by just providing teaser information. Once a potential buyer expresses interest he or she will have to be qualified to ensure they have the financial ability to purchase the business. Once qualified, the broker should have a non-disclosure agreement signed prior to releasing any sensitive details about the business.

Bottom Line

Selling a business can be a difficult process that takes months to complete. If you do it wrong then you could struggle to find the right buyer, or you could cost yourself unnecessary time and money. Knowing the right answers to the most common questions can help you avoid those mistakes.


Posted By: Randall Barondess: Business Broker, Southern CA    

Qualified and "Seasoned" Business Brokers should cover key issues directly related to listing process, technical issues of the listing agreement itself, valuation process, leaseholds and expectations of fiduciary duties of single or dual agency representation. A seller should always ask questions if they are not clear on what the listing agreement means. A few core items that sellers should be clear on is the Lease, Lease Assignment, Guarantors, Length of lease assignment with guarantees (if applicable) or new lease protocol. And, if in the case a "real estate" transaction, how experienced and qualified is the Business Broker in selling CRE (Commercial Real Estate) and do they have the credentials and platforms to accomplish and execute the task.


Posted By: Joe Ranieri, Business Broker: LA, Orange Counties, California    

"What is your list to sell ratio?" Is a question every smart business owner will ask a business broker before acquiring their services, along with, "How many listings do you typically carry at any given time?" These questions will illuminate to an owner if the business broker actually spends time servicing and marketing their owner inventory, because typically a broker can successfully service around 12-15 listings at any given time, and should have a successful list/sell ratio between 50-70%. A productive business broker is also selectively interviewing the owner to see if they are a right match for them and their marketing campaign, just as a business broker is interviewing them for their potential services. An owner should ask to see how their business will be marketed while listed, and if it shows that the business broker cooperates with other brokers to get it sold. An advertisement should help the business remain confidential, but also be nicely worded, and include pictures.


Posted By: John Willingham, CBI, CCIM: Business Broker, Central Valley    

I think the best questions a Business Owner can ask a Business Broker are as follows:

1) How long have you been selling businesses? 2) Do you specialize in selling businesses or is it something you do occasionally? 3) What types of businesses have you sold in the past? 4) Are you a member of any business brokerage trade associations, such as, CABB, IBBA, M&A Source? 5) Do you have any designations or certifications in business brokerage? 6) Do you have Errors and Omissions (E&O) insurance that covers business opportunity sales? 7) What is your business selling process? 8) How will you be able to market my business, while at the same time maintaining confidentiality?

Sellers always what to know what our fee is and they think that is the most important question, but it is not. Using a professional business broker doesn't cost a seller money, but rather it makes them money. A professional business broker brings a lot to the table for a seller.






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