A business broker acts as an agent or intermediary in assisting buyers and sellers of privately-held businesses in the buying and selling process. When you’re considering selling a company, a business broker can provide a great deal of value by being knowledgeable about your industry, having contacts with potential buyers, and communicating honestly with you about items that will be positive and negative for buyers. They should also disclose any conflicts of interest with potential buyers and work well with your other professional advisors.
A good business broker will develop the offering memorandum and obtain nondisclosure agreements from any companies that receive the memorandum. The offering memorandum is the initial marketing information that a buyer reviews. It provides some high level financial information on the company, describes any unique services that the company offers, provides bios for key employees, and outlines exactly what the seller intends to sell – 100 percent of the stock, 100 percent of the assets, or a minority or majority share of the stock or business.
The right business broker will know which companies or firms would have an interest in your company and should be able to provide you a pretty tight range on what they think the purchase price will be. While the memorandum is being completed, or after it is sent, the broker will typically create a data room for prospective buyers to give them more insight into the company.
In most cases, the broker is paid a down payment to compensate them for the time spent completing the offering memorandum. They are then paid a “success fee” if the business is ultimately sold. In most cases, the success fee is based on the company’s valuation versus the actual sales price. For example, if it is only a partial sale, the broker is typically paid as if 100 percent of the company was sold.
After the memorandum is distributed, the business broker should receive letters of interest from prospective buyers on what the contemplated transaction value would be (subject to due diligence). From these letters, the broker will assist you in narrowing the potential pool of buyers to two or three. These potential buyers will then be given access to the company’s records and potentially a quality of earnings report that provides much more detail about the company’s customers, services, and financial history.
During due diligence, you as the seller may eliminate potential buyers based on your interactions with them. Once it is clear that a transaction is going to take place, the broker will coordinate with the company’s legal counsel to start the preparation of the purchase agreement so that once the details are agreed upon, the deal can close pretty quickly. At times, the buyer may prepare the purchase agreement, but we have typically seen this as the seller’s responsibility.
The business broker should see the transaction through to the signing of the purchase agreement and can act as the intermediary between the seller and buyer. We have also seen other professional advisors fulfill this role.
Picking the right business broker can be difficult, but based on the potential transaction value, they can provide a lot of value to a potential seller.
David E. Shaffer is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.
You may also like: