HOUSTON BUSINESS REVIEW

TUTORIAL ON SELLING YOUR BUSINESS: “Selecting A Business Broker”
By Ralph Fain

Ralph Fain is a principal in the brokerage firm, R/Fain Group. Mr. Fain also has over 20 years of broad business experience with Fortune 500 companies. R/ Fain Group is a professional business brokerage firm which confidentially represents the interests of various sellers and buyers. Each week Mr. Fain will give tips on Business Brokering, and how to sell your business.

In an earlier article we discussed the important role a business broker plays in the selling of a business and the functions he performs in that role – qualifying buyers, packaging/marketing the business, ensuring confidentiality, valuation/establishment of the asking price of the business, advertising the business, arranging financing and structuring the sale to name but a few. This week’s article discusses how to select a broker and which questions to ask to assist in this process.

As with the selection of any advisor for your business, it is beneficial to follow a process similar to the one you follow for the hiring of employees – interview business broker candidates. Contact your attorney, CPA or other business associates and/or advisors and ask them for referrals; contact industry associations (IBBA, TAB) or websites for a listing of brokers in your area. Meet with at least two candidates and interview them as you would a management applicant. Some of the questions to be asked are:

- How will you market my business?

- Are you part of a broker network?

- How will you show my business?

- Can you provide references?

- Do you cooperate with other business brokers?

- Can you tell me about you and your business experience?

The sale or purchase of a business can be a complex and comprehensive endeavor requiring not only strategic skills but also an attention to detail. An experienced broker understands the emotional and practical issues involved and is adept at resolving the many issues which may arise during the process. Find out if your broker is experienced and determine his level of experience. Ask each broker “candidate” how long he has been in business, has he ever owned/managed a business (i.e., does he understand what it means to “make a payroll”), is he experienced in mergers/acquisitions/business sales, does he have a broad understanding of the many facets of owning/operating a business (operations, sales/marketing, financial, etc), has he served in management and/or executive level positions of responsibility and authority, etc. Pick a candidate who has a broad base of business experience and who is not also selling insurance on the side.

Ensure your broker will maintain confidentiality and ask him how he will ensure same. You do not want your employees, suppliers, clients and/or competitors knowing your business is for sale - that is a prescription for disaster! Have your broker establish that his process will assure that only qualified prospects receive confidential information and that all identities will be protected. Review your broker’s Confidentiality/Non-Disclosure Agreement and satisfy yourself as to its terms and conditions.

In addition to inquiring as to your broker’s experience, ask for references – either past clients, business associates (e.g., bankers, CPAs, attorneys, etc), trade association members, etc – individuals who can attest to his experience, character, ability and integrity. Two of the most important traits a broker (or anyone else for that matter) can possess are honesty and integrity. Beware of the broker who tells you only what you want to hear – if your sales and profits are on a downward trend and your broker is telling you that you should be able to get a premium price for your business, something is wrong. A good broker will suggest that you not attempt to sell your business now but instead concentrate on improving its results for the next year or so in order that your company can be shown at its true performance level.

Although the broker may be representing you, the seller, a professional broker wants the transaction to be a “win – win” for both parties; only then will the seller and the buyer be truly satisfied. All relevant items/issues of which the seller is aware should be disclosed to the buyer. A broker who will engage in or condone questionable and/or deceptive business practices is a broker to be avoided.

Selling a business is a time consuming and comprehensive process and one which requires much attention to detail. There are a myriad of issues to be dealt with – legal, accounting, financing, tax, and operating to name but a few. Brokers deal with these issues and the negotiation of business sales/purchases on a regular if not daily basis. A good broker is a valued professional with, in the vast majority of cases, a fiduciary responsibility to you, the seller. Accordingly, because of the experience and skill required, a business owner can expect to pay a commission of 10-15% of the sales price of smaller businesses and a stratified or structured commission of 10, 8, 6, 4% for larger businesses. As is generally the case, you get what you pay for and the above fee structure will seem extremely reasonable when you consider negotiating a $2MM sale with a 7 yr earn out, a 10 yr SBA note, a 5 yr covenant not to compete, a 3yr consulting agreement and structured on a stock purchase basis so that the owner received $500K more than he expected after tax – all due to the efforts and expertise of the broker!

See you next time in this same space for our next article. As always, should you have any questions or require additional information please feel free to contact the R/ Fain Group at 832-646-0832 or via our web site.