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Lessons Learned: When and why to use a broker

It is a well-known fact most medium and large-sized companies use an M&A intermediary or broker to help them sell their business.

In fact, most owners of medium and large companies would never consider entering a sale process without a broker by their side. We will discuss some of the reasons below. Going further down this path, I have yet to see a guard, fire or integration company of any size in Canada get sold where there was not a broker involved. It appears that it is only in the alarm business that I see owners doing their own deals and this is mostly (but certainly not always) confined to alarm account bases under 1,000 accounts.

You probably already know some of the reasons why owners use a broker:
• The broker will give the owner a reasonable idea at the outset of what the business is worth. This may seem like an obvious first step but I have heard about deals being done where no target purchase price was set at the beginning of the sale process.
• The broker should do most of the work of getting the business sold, freeing up the owner to continue to run the business. There are endless details involved in getting any deal done that most owners could never imagine; the broker should take care of most of these.
• The broker should know the market for your kind and size of company and be able to bring buyers to the table easily. This is one important reason why I, as a broker, focus on the security industry. The focus allows me over time to find and get to know buyers.
• Using a broker should provide better confidentiality. Buyers are not sending NDAs or calling the owner’s office — both the buyer and the seller are calling the broker.
• A very important part of the selling process is creating an attractive selling package on the company being sold. A good broker should be able to do this.

But there are some other not so obvious reasons for using a broker:
• The stats show that using a broker generally gets the deal done faster and increases the owner’s chance of actually getting the deal done.
• Generally, deals done with brokers result in higher prices. This is because most smart brokers try to create a mini-auction amongst the buyers, thus increasing the price.
• Finally, there is the psychological benefit of just having someone “in your corner.” The buyers usually have a team of people. The owners should have someone on their team too.

So what should an owner look for in a broker or expect from a broker?
• Make sure the broker has had experience selling companies your size. Small, medium and large-sized deals all require a different skillset. For example, last year I teamed up with a larger M&A firm based in Toronto because I wanted to be able to handle larger deals. I knew that by myself I did not have the skillset or horsepower to handle them on my own.
• It helps immensely (but is not mandatory) if the broker has experience in your industry.
• Talk to your prospective broker and see if he or she can explain things in a way that you can understand. Equally important, make sure you feel comfortable working with them.
• As an owner, at the outset you should expect your broker to be able to give a ball park valuation on your company. They should be able to create an attractive, pertinent selling package on your company that talks to buyers.
• They need to know the process of selling a company forwards and backwards. Although not all buyers proceed in the same way, the broker should be able to adjust if necessary.
• A broker’s fees are important, obviously. As I generally sell smaller companies, I don’t like to take big retainers. Most brokers take their upfront fees off their success fee before the latter are paid. As for the success fee, it should vary with the purchase price and the length of time it takes to effect a sale. I always tell my clients that how long it will take to sell their company is also important. Fire, guard and integration companies can take much longer to sell than alarm companies.

Is it mandatory to use a broker in every situation? No, for sure it is not. Can a broker generally make your sale process more stress free? My answer is that they should. A good broker should go into each sale trying to look out for their clients in every way possible — not just the price.

Victor Harding is the principal of Harding Security Services (victor@hardingsecurity.ca).