So, you are thinking about selling your Baltimore business. You’ve seen the websites for the big, national brokers, but you’ve also heard some horror stories from friends about their experiences. You want to steer clear of “the bad guys,” but aren’t sure how to tell a good business broker from the type that just wants your listing and an “easy fee.”
Most business owners have these concerns. You know that you need professional advice to sell your company, but don’t know where to turn. You also know that there’s a lot riding on their choice of transaction intermediary (investment bankers, “Main Street” brokerages and local, boutique brokers), and you are right. Choosing the right business broker to sell your business affects the amount of cash you’ll receive at closing and in some cases, can determine whether you find a buyer at all.
Transaction intermediaries specialize in certain market segments. The type and size of your business will affect which brokers will even consider selling it.
Investment Bankers: Are You a Small-fry or Big Guy?
Investment bankers don’t typically work with companies with revenues less than $12MM. That’s a generalization, of course, and thresholds differ from one region of the country to another since every investment banking firm sets its own limits. It is important to ask about those limits so you can decide where your company fits: will you be a small-fry client or a top-priority on an investment banker’s customer list?
Investment bankers typically charge a monthly retainer along with a percentage of the purchase price.
“Main Street” Brokers: Quantity Over Quality?
At the other end of the spectrum are the “Main Street” brokers. They primarily work with the types of companies that occupy Main Street: dry cleaners, restaurants, etc.
They operate much like residential real estate agents in that they accumulate listings, market those listings primarily on their websites and sign buyers to purchase contracts before buyers have had a chance to do their due diligence.
The Percentage-Based Conundrum
This set-up can lead to a ‘quantity’ over ‘quality’ mentality. When residential real estate agents are working off of a percentage-based commission, they are incentivized to sell more properties rather than sell your real estate for the top dollar. You might be asking “how so?”
Although the agent receives a percentage of your home, the percentage is low enough that increases in the bottom dollar of your home won’t be padding their pocket as much as selling another property would. For example, if your home sells from $350,000 and your real estate agent takes 5%, that is $17,500. If they were able to sell it for $400,000 that would be $20,000, so an increase of only $2,500. Although that may seem like quite a bit, they could much more easily make $30,000 by selling two homes at a lower, quick selling price of $300,000.
Just as the above incentive is built into they way real estate agents do business, it could be similar with the broker trying to sell your business. If their commission is mainly percentage based and is a small percentage, it is easy to see where they would rather follow the money that comes with ‘quantity’ rather than focusing on the quality of your selling experience.
Not all “main street” business brokers operate this way or focus on the financial incentive, but again—it is about locating the right one among the bunch.
Contingencies in Place
When you buy residential real estate, you make an offer with the standard contingencies. Only after your offer is accepted do you have the opportunity to send in your inspector to report on the property’s condition. Main Street brokers typically operate in a similar fashion, except that their asset purchase agreements include many more contingencies (e.g., satisfactory results of due diligence, final negotiation of a price, etc.).
Main Street brokers work primarily with “lifestyle businesses:” those have provided owners with a job and an income that has paid the bills. Like investment bankers, they charge a commission, or percentage of the purchase price for their services. Usually they do not charge retainers.
The In-Between: Lower-Middle Market Brokers
Between investment bankers and Main Street brokers are lower-middle market brokers. They specialize businesses with revenues from $1MM or $2MM to $10MM and cash flow exceeding $450,000. (Again, these figures are rough and vary by region.)
What Level of Service Do You Want? Taking a Closer Look at Your Business’ Finances
Generally, all three types of transaction intermediaries perform similar functions:
- Collect data necessary to put a value on your company.
- Set a sale price.
- Market your business.
- Maintain seller confidentiality via non-disclosure agreements.
- Coordinate your attorney and accountant* to close the deal.
*Main Street brokers aren’t likely to coordinate with your attorney and accountant since they use standard, rather than negotiated, contracts.
What varies from one type of intermediary to another is the level of service within each function. For example, a Main Street broker will accept your financial records as “gospel truth,” base its valuation on standard rules of thumb and set a sale price accordingly. Most lower-middle market brokers will examine your financials to test your estimate of value and look for add-backs that improve the cash flow estimates that they provide prospective buyers. Because buyers in this market bring more money to the table, they know that they will have to justify the purchase price to bankers. For that reason, they will create financial models and projections (rather than standard rules of thumb) to support it.
Their Commission May Apply to Your Business Real Estate
While you’re thinking about the commission rate your broker may be asking, you may also want to think about how his rate will extend to your business real estate. If any real estate is included in the sale of your business, your contract may also be covering a commission based off the sale of said real estate. And if your commission rate is higher than the average for commercial real estate in Baltimore or the DC Metro area, you could be providing more money than planned.
A Broker Is There to Close, Not Walk You Through All Your Options
Selling your business and exiting your business with the most money are too different things. When working with a broker, they are not going to look at all the other options outside of selling your business. Why? Simply put that’s not their job!
It has nothing to do with how ‘good’ of a person they are, but rather, it actually doesn’t make sense if they are there to work on closing your business for sale. Some brokers will offer limited advice but working with a financial advisor or business exit planner may help reveal prospects for your business that you may not have thought of.
Talk to an Advisor Before Using a Broker to Sell Your Business in the DC Metro Area
Are there downsides of working with a business broker? Certainly—if you choose and engage the wrong broker. The sale of your business may be the most significant financial event of your life. Take the time to ask the advisors you trust who they’d recommend as the best broker for you and your business. Give us a call for more advice on the business exit strategies for you and your business in the Baltimore/DC metro area.
Now that we have identified the downsides, join us next time as we discuss FIVE tips if you choose to sell your business through a broker in the DMV area.
