The basic job description of a business broker is the performance of the activity of professionally facilitating the sale of businesses. However, the business models employed by business brokerage firms are not a standardized offering as a spectrum of choices in terms of services and payment options exist for entrepreneurs seeking assistance with the sale of their privately held companies and family businesses. The following article highlights the most significant differences in operating models to assist business owners with the assessment of their options for professional representation.
Side of Representation
Business brokerage firms have the ability to exclusively represent sellers, buyers, or a combination of both. Each side of the transaction has specific issues requiring knowledge, experience, and ability to represent at a high level of skill. On the seller side, issues such as proper valuation of the business, market creation, maintaining a confidential environment for the sale, mitigating the tax implications of the sale, and allaying trailing liabilities for the exiting business owner post transaction are the primary focus. While, on the buyer side negotiating the best possible price, comprehensive due diligence procedures, mitigating transition risk, and obtaining financing and/or investment are given priority. It takes years to achieve proficiency representing one side of the transaction or the other, and even longer to do both well. It is also recommended regardless of the side of representation that a business broker be employed that has relevant industry knowledge. Selling a manufacturing company is different than a technology firm and both are different than a restaurant. No one wants to be a “guinea pig” selling their life work or starting a new chapter at significant personal or financial risk for someone to learn how to sell or buy a business.
Compensation
There are two primary methodologies for paying a business broker for their services. Option one is a 100% commission-based business model. This financial relationship between customer & service provider is straight forward. The business broker is paid a percentage of the sale price or an agreed fixed amount upon successful completion of the transaction. Business brokers who are not successful in the profession do not survive with this business model if they are not completing transactions. This is the compensation model employed by IBA, the most successful business brokerage firm in Pacific Northwest history with an unparalleled achievement record of over 4200 completed transactions in its 47-year history. The second business model involves payment of a retainer and/or administrative fees up front or during the sale process and a success fee when the deal is completed. In theory, payment under either scenario will be approximately equal if a transaction is completed and I readily acknowledge that significant time and resources are expended in the professional representation of a buyer or seller in a business acquisition or sale by a business broker. However, philosophically I also believe the second business model tends to be embraced by M&A intermediaries with less confidence in their sales ability and/or fewer competed transactions on their resume or a less developed pipeline of activity progressing projects from engagement to sale. All potential business buyers or sellers should ask a potential broker for detailed descriptions of their recently completed transactions and projects currently in their pipeline. No one ever should hire a salesperson or professional with 24/7 availability on day one. Successful people are always busy. Low performers always have time available.
Timeline for Sale
In the sale of a business an entrepreneur has a choice, hire a professional intermediary to take the business to market now or one who will help prepare the business for sale with the goal of achieving an exit strategy at a future date. Both business models are employed successfully in the mergers & acquisitions industry with most companies having the ability to enhance their value through preparation strategies employed over 6 – 24 months if recommendations are followed and time & resources committed. That said, as the pandemic has shown us things can also change for a business unexpectantly. IBA is commonly recognized as one of the premier “gun for hire” business brokerage firms in the United States to facilitate the timely sale of a privately held company or family business. Our clients traditionally sell their businesses within 3 to 9 months of entering the market at strong values in deals facilitated with best practices. This occurs because of our market leading knowledge, experience, and ability and is necessary to perpetuate our “paid on performance” business model where we are only paid by happy customers when the project is completed.
Business Valuation
Three business models are employed in the business brokerage industry to establish the value of a company. The firms with the highest level of knowledge & experience cognizant of local & national market dynamics impacting business values have the ability to value businesses internally. One attribute of in-house valuation is that knowledge is obtained that can be used for price justification in the sale process. Basic sales strategy conveys that the best salespeople are those that comprehensively know their product. IBA is recognized in the accounting, appraisal, investment, legal, real estate, and banking communities for its superior knowledge and business valuation ability. Businesses represented for sale by IBA traditionally sell within 10% of their asking price with many selling at their asking price in a competitive marketplace with multiple acquisition suitors.
Absent the ability to value a business in-house, many firms hire outside appraisers to determine the “go to market” value of companies. It is often prudent to delegate activity to professionals when one does not possess an ability. The most significant weakness with this business model is that business appraisers often lack the market knowledge of M&A intermediaries directly engaged in a marketplace in terms of the market desirability and quantity of buyers elements that can impact business value positively or negatively in a specific industry or geographic area.
The third approach commonly employed for business valuation is to take a company to market without a value and let the market determine the value, after all the true definition of value is what an equally motivated buyer & seller would agree in a good faith negotiation. In theory, this auction approach can result in a premium price being paid for a business. However, it has been my experience that instead of a premium price, buyers use this opportunity to offer value price proposals as no direct justification of value is occurring by the broker to potential buyers.
The purchase or sale of a privately held company or family business is a sophisticated nuanced process. Professional representation commonly results in “win-win” transactions and good faith negotiations. If you would like to learn more about IBA’s client services, we would welcome the opportunity to provide an overview. Interviewing multiple business brokers is “best practice” for those interested in employing a professional to sell or buy a business. Knowledge, experience, and skill should be primary metrics for assessment, but all things being equal differences in business models (e.g., paying upfront or on performance) frequently make the decision easy.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.