What do brokers do?
I am often asked by prospective clients, what does a broker actually do? Is it necessary to use a broker to sell your business? How does using a broker help and finally what do they cost?
By Victor Harding
Let’s sort out some terminology first. Broker and intermediary are two words for the same function. Both are usually associated with buying or selling smaller, privately-owned businesses. As the business gets larger, and if publicly owned, we tend to use the term “investment banker” instead of broker.
Brokers can act for a buyer or a seller, although most brokers I have met earn most of their money acting for sellers. The broker usually gets paid their fees for helping an owner sell their business.
The world of intermediaries or brokers is broken down into those that specialize in a particular field (there are not as many as there should be) and those that do not. I specialize in the area of security. I act for owners of all types of security companies (alarm, integration, fire and guard) that want to either sell or buy. I sometimes have to compete with “general” business brokers who claim to be able to sell any kind of business. Frankly, and I am basing this opinion here on actual experience, general business brokers are not very good at selling security companies. First, they don’t understand the special value attached to recurring monthly revenue (RMR) and secondly they simply don’t know the industry (most importantly, the buyers). My strong advice to any owner who is thinking of selling their business, whatever industry they are in, is to hire a broker that has experience in your field.
All brokers that I know have a simple brokerage agreement that they use to lay out the terms under which they will work with their clients. Most brokers working on the “sell side” only work exclusively and will ask for a period of anywhere from four months to a year for the initial term of their agreement. Most brokers ask for a small up-front fee to create the selling package, which by the way can take up to three full weeks of time plus a success fee when the deal is completed. Some brokers will ask for a progress payment when a letter of intent (LOI) has been signed. Brokerage fees are usually expressed as a percentage of the final purchase price and will vary also on the size of the deal — the larger the deal, the lower the percentage. These percentages can range anywhere from three per cent on larger deals to eight or 10 per cent on much smaller deals. My experience is that fees charged by security brokers are generally less than the fees that other brokers charge.
A broker will often work on a deal for over a year. That is how long it can take to sell a company. Secondly, only about 70 per cent of the clients that brokers sign up actually get to a closed deal.
Once a broker has created the selling package, or what is more properly known as the confidential business review, they put out a teaser to potential buyers describing the opportunity but not naming the company. Those that are interested in buying will then talk to the broker and if still interested after that, will sign a non-disclosure agreement in order to get the selling package. This process is usually going on with several potential buyers at the same time. Buyers inevitably have lots of questions for the brokers about the company for sale.
Hopefully the broker can solicit more than one offer for the company he is selling. Going down the road with just one offer is risky; particularly if that buyer gets the feeling they are only show in town.
If and when an LOI is signed, the buyer signing the LOI then gets to do due diligence (DD) on the company for sale. A good broker should pay close attention to this part of the process to make sure the buyer is being reasonable in what they are asking to see. Assuming the DD goes well, the buyer will then produce a draft of the purchase and sale agreement. While I don’t think the seller necessarily needs to use a lawyer to review the LOI, I strongly suggest all sellers employ a lawyer to review the purchase and sale agreement. By the way, a good broker in a field will have seen several other purchase and sale agreements and can help his client immensely by giving his clients his comments on the purchase agreement. Although the back and forth process on the deal is at this stage mostly between lawyers, a good broker can help solve road-blocks on the deal right up to the closing date.
Is it absolutely necessary to use a broker to sell your business? The answer is no. Lots of alarm companies in particular were sold in Canada before a brokerage function appeared to service this field. Did all those sellers get the best possible deal for their accounts? We will never know. As the size of your alarm business increases or if your business is an integration, fire or guard company I think there is a greater need for a broker.
In the end, using a good broker should accomplish the following for you if you are a seller:
- Allow you to continue to run your business while your business is being sold. Remember, selling your business can take up to a year or more in time.
- Give you at the outset a good idea of what your business is worth.
- Make sure your business is shown to all the best buyers in your field. This helps maximize your selling price.
Victor Harding is the principal of Harding Security Services (email@example.com).