Article Summary of 6 Advantages To Selling A Business Without A Broker:
- Is Selling A Business Without A Business Broker The Best Way To Go?
- What is a Business Broker?
- Why Consider Using A Business Broker?
- 6 Advantages to Selling Your Business Without A Broker
6 Advantages To Selling A Business Without A Broker
Is selling a business without a broker a smart approach or savvy business decision?
If you’ve come to this article, you are probably considering selling and looking for helpful tips to sell your business. There are many different reasons for and levels of motivations when selling a business.
21.9% of small business closings in the United States are due to retirement. If this is you, you probably know this number is projected to increase as the Boomer generation continues nearing retirement.
What does this mean?
According to the U.S. Census Bureau, boomers own about two-thirds of business with employees – approximately 4 million businesses. If hypothetically speaking, an equal number of retiring business owners try selling their businesses each year, over 210,000 businesses would hit the market each year by 2030.
The problem? In 2017, only 7,842 small businesses were sold.
Thousands of business owners – just like you – are out in the market looking to sell right now. Next year thousands more will hit the market.
This excess supply will make it more difficult for the average person to sell a business.
Selling With A Business Broker Is The Way To Go, Right?
Let’s make an analogy between selling a business with selling a house.
When looking to sell a house, what’s the first thing most people do? They go out and find a professional real estate agent.
After all, Realtors:
- are experienced in this specific niche
- have a network of buyers
- understand the paperwork involved
- have skills set necessary to negotiate
From a risk perspective, there is very little time and effort involved on the homeowners part and they pay a fee only when the sale occurs.
When To Use An Investor Instead
This situation works great for those who those with a house in sellable condition, with a good deal of equity, and can wait for a period of 6 -12 months to sell.
But what if your not in this ideal situation? What if your house requires a new carpet, paint, A/C, or roof in order to make sellable? What if you’re behind on payments or owe more than the house is worth because the value of homes is dropping due to oversupply?
In this real estate example, many people forgo using a Real Estate Broker and instead go directly to real estate investors.
Using a business broker to sell your business may make sense initially. After all, you’re a business owner with expertise in your industry – NOT in selling a business. Why not use an expert?
Just as is the case with the real estate example, not all business sales are simple and straightforward.
What is a Business Broker?
A business broker is a third-party that acts as a go-between to help a business owner sell their company. They provide this service for a moderate fee — usually around 10%. The business owner and broker will sign an exclusive contract for approximately one year where the broker will work to sell the business.
It is simple to become a business broker as there is no official licensure required. However, some states require that brokers get a real estate license. Brokers receive certification through organizations like the International Business Brokers Association, but this isn’t required.
Many business owners assume that using a broker is the best and right course of action, but as the real estate analogy above shows, this isn’t always correct. As the market seeks equilibrium due to the rush to sell, business owners like you should ask: Should I sell my business without a broker?
I’ve never had a decision in business that was as straightforward as it first seemed. I love the challenge of buying, selling, and operating businesses. It’s in my blood. Using a broker is one decision that seems obvious, but on closer inspection isn’t.
6 Advantages to Selling A Business Without A Broker
Pro #1: Don’t need to pay a broker commission
Brokers require a commission of anywhere from 6% to 12% of the final cost of the sale. As the seller, you will pay this fee from the closing cost. In addition, you may have to pay an upfront fee to secure the broker, which often is credited against the final sale. This can be a large chunk of money for relatively little work. You built the business, grew it, struggled through the ups and downs, and an outsider comes in and reaps a windfall just by connecting you to a buyer. Selling without a broker means you get to keep that chunk of your hard work.
Pro #2: Don’t have to work with a self-serving broker
Brokers are in it for the money. As a middleman, they’ve come to the sale looking to make a profit. Yes, they usually work for the interests of the buyer, but make no mistake: they are looking for a big cut.
As an example of this, assume your business is valued at $1 million. You and your broker negotiated 10% of the final sale price. A qualified buyer offers $900,000 for the business. Not a good deal for you. You want as close to or above $1 million. That’s $100,000 less, a big chunk. However, from the broker’s perspective, the difference is between the 10% commission rate of $100,000 and $90,000, only $10,000. They have the motivation to push a sale at your expense.
Pro #3: No risk in hiring an ineffective or incompetent broker
More brokers in the market don’t mean more competent brokers, it means less by percentage. The business broker market is largely unregulated, and this is a problem. Finding a broker who is able to quickly and effectively sell your business at the right price will be harder.
If you don’t use a broker, you can rely on yourself for the sale. You know your strengths and weaknesses, and you don’t have to guess about the skills and qualifications of a third party.
Pro #4: Retain full control in selling your business
Let’s face it, you built your business. You know your business better than anyone else. You can sell your business better than anyone else.
With a broker, you give up control during the sale. Yes, a savvy broker will ask the right questions, will poke and prod to get the best answers to buyer questions. However, when it comes to the pitch, they will only know what you’ve told them.
Pro #5: No risk in signing an exclusive contract that might not work
The standard contract length for a broker is one year. This is a point you can negotiate. Some sellers prefer six months or a three-month trial contract. Most small business sales range from 3 months to 18 months.
Brokers almost always require an exclusive contract where you work only with the broker. This isn’t a problem with a competent broker that knows your business. But, if you sign with the wrong broker, you will be stuck in a contract for months.
No broker means no contract. You can work at your pace and sell when you need to sell.
Pro #6: Many more creative options for selling your business
Since business brokers work for a commission, they’re highly motivated to sell for the highest price possible. This can cause the broker to weed out a lot of other alternatives that may benefit you but would lower their commission. For example, an offer of deferred payments over 7 years may yield you a higher overall sales price and be a ‘win’ for you, but the broker may reject the deal because it hurts their commission.
Conclusion of Selling A Business Without A Broker
If you have a thriving business with equity, positive cash flow, a great management team in place, and you’re not in a big hurry to sell, then using a broker to help sell your business makes sense. However, if you are like many small business owners, you may need to be more creative in selling your business. Like the real estate example above, you may need more than a broker to put a ‘for sale’ sign in your yard. If this is the case, then selling your business without a broker and finding an investor who specializes in actually purchasing the business is a better deal for you.