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Ultimate Guide to Selecting a Business Broker

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Nine Questions you should ask and the answers you should expect to receive when interviewing a business broker.

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Ultimate Guide to Selecting a Business Broker

  1. 1. “I went through several brokers before I found one who was competent enough to properly prepare, price, market and sell my business. I wish I had this guide when I started my pro- cess. I would have sold much, much sooner.” Joe Waite Former Owner Platinum Dry Cleaners Key Questions • Certifications • Associations • Co-Broke • Full-Time • Sales Record • Fees • Valuation and Pricing • Marketing Process • Confidentiality The IBBA reports a competent broker can add as much as 20% to your selling price. You have one opportunity to sell your business You will want to hire the most qualified individual possible to assist you. This guide asks nine very important questions all business owners should ask when hiring a business broker. The profession is known for its lack of competence as it is often attracts unqualified individuals who may mean well, but lack the necessary temperament and skills to complete a successful transaction. Make the right choice • Take your time. Do not be afraid to start the process a year or more before you plan to put your business up for sale. • Interview multiple brokers. A second, third or even fourth opinion never hurts. • Competency and focus is critical. You would not hire a podiatrist to perform heart surgery; therefore, why would you hire a commercial or residential realtor to sell your business? It will benefit you • BizBuySell reports only about 20% of businesses listed on their website sell. • The International Business Brokers Association (IBBA) reports a competent broker can add as much as 20% to your selling price. July 2017 ULTIMATE GUIDE for Selecting a Business Broker
  2. 2. 1. What are your qualifications, experience and certifications? It is critical your broker is an expert at analyzing and recasting financial statements; valuing and pricing businesses; and marketing and advertising. Experience and creativity matter It is important your broker has been selling businesses for at least several years. Selling a business is incredibly difficult. You need a broker who has the experience and creative skills needed to keep your deal together. Former business owners make the best brokers. A broker who has operated, bought and/or sold their own business is better prepared to understand your emotional needs and financial goals while guiding you through the process. Certified Business Intermediary If your business is below $1M in EBITDA, make sure your broker is an active Certified Business Intermediary (CBI) registered with the International Business Brokers Association (IBBA.org). A broker who has obtained the CBI designation has met the stringent education requirements and high ethical standards of the IBBA for main street business sales. It is important your broker is an active CBI. To maintain active status, the IBBA requires continual membership and education. Certified Merger & Acquisition Master Intermediary or Professional If your business is above $1M in EBITDA, make sure your broker/intermediary is a Certified Mergers & Acquisitions Master Intermediary or Professional (M&AMI or CM&AP). The M&AMI and CM&AP requires achieving in-depth knowledge of the specialized approach required to successfully prepare and execute lower- middle-market M&A. Hire someone who has invested time and dollars into their craft. Creativity keeps deals together. Hire a CBI, M&AMI or CM&AP A certified broker/intermediary has the necessary training to understand: • Analyzing and Recasting Financial Statements • Valuing and Pricing • Marketing and Advertising • Ethical and Legal Aspects of Business Transactions • M&AMI and CM&AP’s Understand the Specialized Approach Required for Lower-Middle-Market M&A If your broker/intermediary is not certified, it is a clear indication they have not made the investment in time and dollars to ensure proper care in preparing and selling your business.
  3. 3. State and Regional Associations • Business Brokers of Florida • California Association of Business Brokers • Texas Association of Business Brokers • Carolinas-Virginia Business Brokers Association • Midwest Business Brokers & Intermediaries • New England Business Brokers Association • Pennsylvania Business Brokers Association • Mid-Atlantic Business Brokers Association • Arizona Business Brokers Association • Michigan Business Brokers Association • Colorado Association of Business Intermediaries Associations provide education, marketing and networking benefits. 2. What business broker associations do you belong to? Associations such as the International Business Brokers Association (IBBA) and state/regional associations such as the Business Brokers of Florida (BBF) provide not only excellent marketing and networking benefits, they also provide training to stay on top of the latest processes, methods and tools for selling businesses. Members of associations are better trained and equipped to sell businesses. International Business Brokers Association As of June 2017, the IBBA has over 900 members. Roughly half of the members have earned the prestigious CBI designation. For more information on the IBBA, visit their website at www.ibba.org. State and regional associations Florida is the most organized state when it comes to business brokerage. Their association has over 1,200 members and promotes co-broking. California and Texas are also very well organized. Other state and regional associations are listed in the left-hand margin. 3. Are you willing to co-broke? Co-broking is helpful as it maximizes your business’s exposure to buyers. With the exception of BBF members in Florida, very few associations require co-broking with other business brokers. Financial planners, CPAs and business attorneys are often great resources for finding buyers and sellers. Where allowed by law, referral fees can entice other professionals to refer buyers and sellers to your broker. Your broker’s focus should be on selling your business to the first qualified buyer and not on earning 100% of the commission. Ask your broker how they plan to cooperate with other brokers. Cooperation gets deals done.
  4. 4. You deserve an expert at transacting businesses and available when you need them. 4. Do you sell businesses full-time? Your broker should be 100% dedicated to business transactions. If your broker’s time is split between selling houses, commercial properties or other side-jobs, they will have less time to commit to learning the nuances required to sell a business and to you. You deserve a broker who is an expert at selling businesses and available when you or a prospective buyer needs them to keep your deal together. 5. What is your sales record? Ask your broker for the number of deals and average transaction size they completed in the past year and lifetime. How many deals are near your transaction size? This will give you an indication of how many buyers your broker has financially qualified to complete your transaction. If your broker has only completed very large transactions and your business is worth $500K, chances are they are not talking to buyers who will buy your business, and visa-versa. 6. What are your fees? Success fees Expect to pay a success fee of 10% at time of sale for a business transacting under $1M, $10,000 for a business transacting under $100K and Double Lehman for transactions over $1M. Some brokers want to charge 12% or 15%. If you have a good, solid and profitable business, demand 10%. If your business is struggling or the broker believes you may be difficult to work with, 12% or 15% may be fair. Advance fees Some brokers will charge an up-front fee to list your business for sale, perform specific marketing programs or complete a valuation. Ensure any up-front fee is discounted against the commissions upon the sale of your business. A broker asking for significant sums of money up-front, e.g., $5,000 or more to list your business, will likely to be less motivated to sell your business than a broker who earns their fee upon successful sale of your business. Know what you are paying for. Realtors Are Not Business Brokers Many business brokers are realtors due to State licensing laws. Do not confuse the two. Selling homes and commer- cial properties is very different from selling a business. Many residential and commercial realtors trying to sell businesses often do not understand or respect confidentiality nor do they understand the financial recasting, valuation and pricing processes at a depth necessary to successfully sell your business and maximize your return. Sales Record • Number of Deals • Average Transaction Size in the past year and lifetime.
  5. 5. Valuation Methods MARKET Approach • Direct Market Data Method • Guideline Public Company Method • Mergers & Acquisitions Method INCOME Approach • Capitalization of Benefits Method • Discounted Future Benefits Method • Multiple of Discretionary Earnings (DE) Method ASSET Approach • Net Asset Accumulation Method • Excess Earnings Method Valuation Tools • Pratt’s Stats • BizComps • PeerComps • BBF MLS • Proprietary Tools Adjustments Made for • Industry • Assets • Inventory • Buyer Perceived Defects/Risk Factors • Fair Compensation • Debt Coverage • Return on Investment Pricing Factors • Supply and Demand • Willingness to Offer Seller Financing • Strategic or Synergistic The percentage of brokers who do not value and price properly is shocking. 7. How do you value and price a business? Having a thorough understanding of analyzing and recasting financial statements is critical when valuing and pricing a business. Trust can be broken and deals can fall apart if the initial recast by the broker is inaccurate. In general, there are three approaches to valuing a business, i.e., Market, Income and Asset Value. Together these approaches have eight methods for valuing a business. Your broker should know the appropriate valuation methods to select when valuing your business, e.g., Direct Market Data, Multiple of Discretionary Earnings, M&A and Excess Earnings Methods. Access to valuation tools is imperative Competent brokers have access to many valuation tools; specifically, sold databases and valuation software. Sold databases include the Pratt’s Stats, BizComps, PeerComps and BBF MLS. Valuation software includes BizComps, PeerComps and proprietary tools. Adjustments are made to the valuation based on industry, assets, inventory and buyer perceived defects/risk factors. Your broker should also take into consideration a buyer’s fair compensation, debt coverage and return on investment when valuing your business. Pricing is dependent upon supply and demand of your business type, your willingness to offer seller financing and in rare cases interest from strategic or synergistic buyers. If your broker lets you set the price, or simply uses “rules-of- thumb,” they are not doing their job and the chance of selling your business is diminished. If your broker lets you set the price or uses “rules-of-thumb,” they are not doing their job.
  6. 6. 8. What is your marketing process? Anyone can post a listing on BizBuySell and BizQuest and wait for emails and phone calls. Does your broker re-enter listings periodically to move them back to the top? What other listing websites do they utilize? Do they have an active buyer email list and how many qualified buyers are on it? How often are they in contact with these buyers? How active are they on social media, especially LinkedIn? Will they do targeted marketing campaigns based on an agreement with you? Confidential Business Review Ask your broker for a recent Confidential Business Review (CBR). The CBR should answer the basic questions a buyer will ask to determine if the business is a good fit or not. Sadly, many brokers are lazy and only provide marked up P&Ls or tax returns. Laziness wastes a ton of time for buyers and sellers. Most buyers will simply skip over a business not properly prepared for sale. Others will demand a meeting with the seller only to ask very basic questions that if answered in a CBR, would have led the buyer to realize the business is not a fit. Industry overview In some instances, it is helpful for the CBR to include industry market, trend and benchmarking information to better understand your companies position in your industry. This information can be obtained from databases such as BizMiner and IbisWorld. Ask your broker what industry databases they use to help position your business. Lower-middle-market strategy If your business generates more than $2M in EBITDA, BizBuySell and BizQuest are not the best marketing tools for finding buyers. In fact, placing it in public listing forums and/or putting a price on the business is a sure sign of your broker's incompetence in handling a business your size. These businesses need to be placed in lower-middle-market deal rooms such as Axial, DealNexus or BankerBay where private equity groups and large private or public investors search for acquisitions. Sophisticated investors will have their own process for valuing a company; therefore, establishing a price sets an upper limit on what a buyer may be willing to pay. Sadly, many brokers are lazy and only provide marked up P&Ls or tax returns. Marketing Process • Appropriate Websites • Re-Enter Listings • Buyer Email List • Social Media Ads • Targeted Marketing Campaigns CBR • Business Description • Price and Terms • Financial Recast • Asset List • Competitive Overview • Customer Overview • Employee Overview • Facilities and/or Lease • Hours of Operation • Industry Trends • Inventory • Licenses Required • Products and Services • Required Skills • Reason For Selling • Restrictive Covenant • Seasonality • Transition Assistance • Year Established • Other Industry Overview • BizMiner • IbisWorld M&A Strategy • Corporate and Private Equity Buyers • Unique Deal Sourcing Platforms • Quality of Earnings Report
  7. 7. 9. How do you ensure confiden- tiality and qualify buyers? Non-disclosure agreement Keeping the sale of your business confidential is very important. It can be detrimental if customers, employees, competitors or suppliers become aware you are selling. Ask what policies are in place to keep the details of your sale confidential. Every prospect should be required to sign a non-disclosure agreement (NDA). Personal financial statements and skill set If your business is priced over $100K, make sure your broker demands a financial statement from each prospect and takes the time to learn a little bit about their qualifications to operate your business. The last thing you want is to waste your time with a prospect who does not financially qualify to purchase, or have the right skill set to operate, your business. Maintaining confidentiality is crucial in the sell of a business. Handling Inquires • Non-Disclosure Agreement • Personal Financial Statement • Skill Set Qualifications • Seller Approval to Release Confidential Business Review Offers and Closing • Offers Presented within 24-Hours of Receipt • Due Diligence Management • Assist with Lease and License Transfers • Recommend Lenders, Closing Attorneys, etc. Every prospect should be required to sign a non-disclosure agreement (NDA). Key Questions • Certifications • Associations • Co-Broke • Full-Time • Sales Record • Fees • Valuation and Pricing • Marketing Process • Confidentiality
  8. 8. Contact Us Address 8891 Brighton Lane, Suite 105 Bonita Springs, FL 34135 Phone 239.738.6227 Email Eric@EdisonAvenue.com Website www.EdisonAvenue.com By investing time and money in education, certifications and best practices, Eric has achieved tremendous return for Edison Avenue clients who have successfully transacted businesses at a much higher rate than the industry average. Results Eric J. Gall is the registered Broker and a Managing Partner at Edison Avenue. Over the past 20 years, he has participated in many forms of business transactions totaling over $140M. He won the 2016 & 2014 Business Brokers of Florida (BBF) #1 Top Dollar Producer Award for Southwest Florida beating out 70 other BBF brokers. His 2016 transaction volume ranked seventh in the State of Florida out of 1,115 BBF brokers. He is the only broker in the Top 10 not located in the larger Tampa, Orlando or Miami/Fort Lauderdale markets. Credentials Eric is highly credentialed having obtained his Certified Business Intermediary (CBI) from the International Business Brokers Association (IBBA) and his Certified Mergers & Acquisitions Professional (CM&AP) from Kennesaw State University. He is one of two active CBIs and the only CM&AP in Southwest Florida. The CBI requires meeting stringent education and performance requirements as well as the high ethical standards of the IBBA. The CM&AP requires achieving in-depth knowledge of the specialized approach required to successfully prepare and execute lower-middle-market transactions (above $1M in EBITDA). Eric holds BSE and MBA degrees from the University of Michigan. Experience Prior to co-founding Edison Avenue, Eric bought, sold and operated several businesses in the automotive, IT and transportation sectors and worked in Corporate M&A at Ford Motor Company. He is a member of IBBA, BBF and is the ABBA's National Best Practices Forum Leader. Trust a firm with proven credentials and results. July 2017 Why Edison Avenue?

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