Do you have to make use of a Business Broker? - Yes, No ...or WHY?
Once you decide to sell your business, the first question that will come up, is:
“How do you go about it?”
THREE QUICK QUESTIONS:
- What and how will you tell your employees?
…they will have to know about your plans sooner or later.
- How will you protect the intellectual capital of your business?
…even your opposition might get hold of your business information if not careful.
- How will you assess the purchasing ability of prospective buyers?
…do you have time to waste with time wasters?
THE REALITY IS:
Your business information is confidential and you obviously don’t want to upset your employees, or your clients.
The first approach of a seller often is to try and sell the business in a DIY attempt. Soon you will realize that you are trying to sell something that you are hesitant to advertise or promote.
If by any chance you get response form a potential purchaser, you don’t want to disclose your confidential business information.
Furthermore, chances are good that a potential purchaser will ask for an option to have time to arrange for the financing of the purchase amount. If the seller doesn’t know exactly how to deal with this, or If not dealt with in a proper and structured way, granting such option may drag the negotiation process out and actually prevent the seller from entering into negotiations or a sale agreement with a next qualified and able purchaser.
SO, WHAT IS THE SOLUTION? ….you may ask.
...Firstly, please allow me a brief example as background:
Though it may be argued that business is business and if you are in business you know what you do, it can’t be denied that certain knowledge and experience is gained in each and every business sector, specific to that sector. If you are for instance involved in the business of information technology, your skills will be on a complete different level than the owner of an exclusive motorcycle accessory and repair shop. The owner of the IT business will need the skills offered by the motorcycle shop to have his motorcycle serviced and the owner of the cycle shop will need the skills offered by the IT business to maintain and keep the online support systems of his business operational.
Business owners may employ people with specialized skills, so it can be argued that the owners don’t necessarily need to have the exact specific technical skills required in these businesses. Over a period of time however, skills that are true to a specific sector will be accumulated by the owner and he will become very knowledgeable in their area of his business. Fact is, businesses and by implication, business owners needs to be knowledgeable in their field to be able to serve their niches.
It is the same with business brokers. They are trained and experienced in selling businesses. They have developed skills through experience to deal with the marketing of businesses, to assess potential purchasers before disclosing detailed business information to them and to facilitate the whole process of sale. They can be regarded as experts in their niche.
A conclusion that can be drawn from this example is, if you are not servicing your own motorcycle and you are not doing your businesses’ own IT support, why would you take the risk of trying to sell such a big asset of yours in a DIY attempt. If it is not your everyday line of business, are you not entering a business area without the specific knowledge and skills required for the job?
Your business may be one of the biggest assets you have. At the time of selling it, why would you put yourself at risk by trying to operate in a field that you’re not experienced in?
WHAT IS THE VALUE THAT A BUSINESS BROKER CAN ADD TO THE PROCESS?
The business broker can facilitate the whole process of sale of the business, or shareholding in a business. In summary, assistance can be offered in the following areas:
1. Assist seller with business assessment and financial analysis.
2. Provide an experienced opinion on a realistic value of the business. (reasonable offer)
3. Guide seller in informing employees of the sale to keep their loyalty.
4. Ensure confidentiality, business protection and create a base of trust.
5. Compile effective marketing materials, brochures and advertisements.
6. Advertise in media and advertising platforms.
7. Offer the business as an opportunity to an existing purchasers list.
8. Find and assess purchasers.
9. Disclose information in a confidential way to qualifying prospective purchasers.
10. Assist with negotiation processes and act as a buffer between the seller and purchaser.
11. Manage due diligence processes.
12. Assist purchasers with financing sources and options.
13. Compile a “Heads of Agreement” Document from which legal experts draft the sale agreement.
14. Facilitate transaction through knowledgeable legal expert associates.
15. Finally, the seller will be in a position to keep focus on the day to day running of his business. By knowing the process is in the hands of a capable business broker, the seller can “maintain business as usual”
MANDATE: YES OR NO?
Yes, as author of this article, I am a business broker and;
Yes, so often I hear the same thing from sellers and that is;
...“You may sell my business, but I’m not giving a mandate to anyone.”
I agree, it remains the prerogative of the seller to decide on who may sell the business, but please allow me to shed some perspective on the implications of appointing a broker on an exclusive mandate or not:
Sellers may prefer to keep their options open, and being in the trade long enough, I think I know most of the reasons why.
I’m sure that, as a seller, some of the following might have crossed your mind:
- You may be lucky and sell your business yourself and then you don’t want to pay broker fees.
- You don’t trust business brokers.
- You know that you might need the expertise and services of a broker, but you just want to keep your options open.
- You don’t want to allow a situation where you are bound to depend on a broker to sell your business.
- You think that, if you allow more brokers to market your business, you may find a purchaser sooner.
Let’s turn the rolls over for a moment and try and put you (seller) in the shoes of the business broker and then give some thought on the following:
- The business broker earns commission as remuneration for his services and does not charge fixed fees for services rendered. Payment for services only occur once a transaction has been successfully concluded and funds are flowing.
- If a seller appoints a broker on an exclusive mandate, the chances are 100% that the broker will earn from the transaction when the business is sold.
- When the seller agree to allow the broker to market the business, but the seller also reserve the right to sell the business himself, the chances for the broker of earning anything from the transaction is immediately reduced by 50%. (Or even more as the “compete with supplier principle” applies)
- If the seller reserves the right to sell self and appoints only one other business broker as well, the chances of each broker to earn anything from the sale of the business is reduced to 33% or even less.
The question is, if a broker has three businesses listed, namely:
1. An exclusive mandate with a 100% chance to earn from a transaction;
2. A mandate where the seller remains the right to sell, with a 50% chance to earn something;
3. An open mandate shared with other brokers with a 33% or less chance to earn anything.
Will you agree that it can be expected that that the attention and efforts and of the business broker will be prioritised in the same order as above? ... (remember our reversed role play :)
TRANSFER OF RESPONSIBILITY AND COMMITMENT
When a seller commits to a business broker with an exclusive mandate appointment, the seller actually transfers a huge responsibility to the broker. The broker now has a duty to perform, to serve the seller in the most effective ways possible and in return have to commit to the seller.
Knowing that remuneration is guaranteed at the sale of the business will further serve as motivation for committed service.
REASONABLE OFFER AND EXPECTATIONS
When a seller offers a business for sale and a business broker is appointed to assist with the process, the business becomes the product which the broker has on offer to potential buyers. To conclude business, there must be a willing seller, but also a willing buyer. In order to facilitate a transaction, the offer to the buyer must be reasonable. It can’t be expected of anyone to successfully sell a product which is offered outside of it’s reasonable range of value.
Sellers sometimes have unrealistic expectations when they list their businesses for sale and then expect business brokers to “see what they can do”.
Business brokers don’t get paid for their expertise, time, business expenses and advertising costs other than when a sale is concluded. Therefore, as much as brokers appreciate exclusive mandates, they cannot be expected to commit themselves to mandates if the business offer is not a realistic offer.
If you consider selling your business, it will be to your advantage give careful consideration to the content of this article. It is strongly recommended that you obtain the services of a committed business broker.
For expert advice in the field of selling businesses or shareholding in businesses, or to answer any of the questions you may have, simply click here to contact us.
..Was this article relevant and informative? Please leave your comment below.
Author: Cobus v d Merwe
Copyright INCOMPROP 2017
How can I assist you in your property needs?