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  • Lamar Rutherford

Consultative versus Transactional Business Brokers, Part 1

Updated: Jun 12, 2023


Two business women looking at something on a laptop

Maybe you’ve been wary about working with a business broker or M&A advisor. Of course, not every broker or advisor is the right fit, and it’s critical to find the right broker for you.

Some brokers play the volume game. If they get enough listings, one is sure to sell. But that’s not the best situation for you. You need a broker who understands your business and is committed to selling it.

A good broker can add from 10% to 100% to your value.

There are critical points to look for, to determine whether a particular broker is a good fit or not. · Has the broker created and run a business, and then sold it?

Brokers who have “been where you are” bring valuable experience to your situation.

Two types of business brokers There are two types of business brokers, transactional and consultative. How do you know which one is right for you?

· Transactional brokers will only handle your deal if you're ready to sell now for whatever price you can get today. · A consultative broker will work with you to define your goals and see if we can meet them today. If not, the broker will work with you to prepare your company, so you can meet your goals when you do sell.

Selling to an outside party might not always be the best option.

Consultative brokers help you evaluate all of the options, including: · Transitioning the business to an employee or family member · Putting management in place and not selling the business, so you still get an ongoing income stream.

A consultative broker will work with you to help determine what's right for you. The key differences between brokers PREPARING YOUR BUSINESS TO MAXIMIZE ITS VALUE

Transactional brokers do not help restructure or change your business. Consultative brokers will help you make changes necessary to get a higher value. It could mean simply cleaning up your books. Or it could involve something more in depth, like restructuring your operations or creating new revenue streams.

ACCOUNTING IMPLICATIONS

Transactional brokers don't always have a deep knowledge of accounting. Consultative brokers understand the numbers. They have a good grasp of your financials and can also better explain your situation to buyers. · This is an important skill. If buyers can better see where the value is, they will better understand how they can leverage that for their own success. And that can drive up the price.

HOW BROKERS FIND BUYERS

Transactional brokers will list you on websites like BizBuySell, which is good. Consultative brokers take it a step further. They not only have deep databases of qualified buyers ̶ but will also work with you to find strategic buyers. · The goal should be to find several good buyers to inspire a bidding war and drive up the value.

HOW BROKERS PRICE YOUR BUSINESS

One of the biggest challenges with the wrong broker is that they often set unrealistically high price expectations. They agree to sell your business for that super-high price that you're sure it's worth, instead of telling you the real value. If your business sits on the market, the broker has to keep dropping the price until it's at or sometimes below the value it was worth in the first place. As the price drops, buyers, like sharks, smell blood in the water and wait until you're really desperate.

Consultative brokers will tell you if your expectations are too high. We'd rather tell you the truth up front. And if the price doesn't meet your needs, we’ll work with you to get it. Transactional brokers often don't have much experience with different deal terms and ways to structure a deal. But knowing those options can make or break a deal.

· I had one buyer who was going to walk away because he was nervous the key employees would leave after the deal closed. · We solved it by allocating a small portion of the purchase price to key employees as a bonus, to be awarded a year after closing. This made the buyer comfortable that they would stay long enough for a successful transition. And he went ahead with the purchase.

Broad knowledge of terms and structures can not only save a deal, but make it more favorable. More next time in Transactional versus Consultative Business Brokers, Part 2 . . .

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