Sell your small business with or without a business broker
The decision of whether to hire a business broker to assist in the sale of a small business is highly dependent on the situation facing the small business owner. So before you decide we want to present to you the pros and cons of working with a business broker.
Pros of Selling a Small Business with a Broker:
Avoid common pitfalls:
Business brokers provide guidance to avoid common pitfalls in an often complex process: preparing the business for sale, marketing the business to potential buyers, navigating due diligence, negotiating a transaction, completing legal documentation, and closing a sale is a complex process with many potential pitfalls. Having a solid guide in this process will benefit most small business owners.
A larger pool of buyers:
Brokers maintain a network of potential buyers that are looking for small businesses. Access to a larger pool of interested buyers is helpful in identifying a potential match and createing a competitive process that ensures that a seller achieves a successful outcome.
A buffer between seller and buyer:
Maintaining a positive relationship between seller and buyer is important to getting a transaction across the finish line, particularly if the seller will work with the buyer after the transaction closes.
Cons of Selling a Small Business With a Broker:
A standard broker fee or commission is typically based on a Lehman Fee structure. The Lehman Fee structure was developed by Lehman Brothers and is the most common fee structure in small company mergers and acquisitions.
The Lehman Fee is calculated as follows:
- 5% of 1st million of proceeds
- 4% of the 2nd million
- 3% of the 3rd million
- 2% of the 4th million
- And 1% of the remainder
So, for clarity, a $10M sale results in a $200,000 fee. Some brokers may charge a flat fee structure, like 3%. In many cases, brokers will request a monthly retainer in addition to the closing fee.
Loss of Control:
Hiring a broker requires the business owner to trust that the broker will run a structured process that accurately conveys the business to the market. For some business owners, this loss of perceived control is extremely difficult to imagine.
Conflict of interests:
Just like in the sale of a home, a broker has an incentive to get a deal done so they get a fee or commission. Business owners must be aware that this conflict of interests exists and that a bad deal for the seller can be a good deal for the broker.
Market data shows that on average only around 30% of small businesses that are brought to market ever get sold (This data refers to all methods of selling a business including businesses-for-sale websites, some brokerage firms have better results). Another thing to keep in mind is that often times brokers are charging a monthly retainer for their services, if you choose to work with a broker, make sure that they are incentivized properly by the closing fee instead of the monthly retainer, otherwise you may end up spending a lot of money and time without seeing the results.
If you would like to eliminate the conflict of interest completely, working with a broker may not be the best option for you. You can read about the two other methods for selling your business in our article “The 7 stages to Selling Your Small Business”.
Finally, if you choose to sell your business with a broker, choose a broker that has a good reputation, access to buyers, and a high success rate.