Working with a Consultative Business Broker When Time to Sell
Updated: Jun 13
This is part 2 of an interview with Lamar Rutherford for the Exit Story video podcast: Working with a Consultative Business Broker When Time to Sell.
For businesses that have between $2 million and $50 million in revenue, we look for a minimum net of about $300,000. Most of these businesses will sell for close to a $1 million price tag. For those selling for more, those transactions tend to be a little bit more sophisticated.
Once the business has more than $500,000 in net or adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), then you start to get more of the financial buyers. They're more interested in a price tag of $5 million, and definitely above $10 million.
As business brokers, we charge a commission on the final sale, and an upfront marketing fee. For larger clients, we recommend our online version of a marketing presentation for the business (often referred to as a pitch deck) that includes a video, online data vault, and an interview of the owner, most of which is only accessible once the buyer signs a non-disclosure agreement.
Most of our sellers are sophisticated enough to recognize that this online video presentation makes a huge difference in helping buyers quickly understand the business. It also saves a ton of time and effort on a seller's part. If we didn’t have the video interview, then the seller would need to make time to talk to each interested buyer. Often, that means a lot of meetings for the seller with buyers. We do pre-screen every buyer, but if it's a popular business, there can be a lot of interest. For example, we have an IT client that is selling. To date, I have over 150 NDAs (non-disclosure agreements) signed from interested buyers.
For most brokers, the commission on a smaller transaction typically starts at 12% and then decreases as transactions get bigger. Most also have a minimum, typically $15,000 for smaller sales (for example, if the sale is under $100,000, the commission will still be $15,000.) For larger businesses, there may be a higher minimum.
Not All Business Brokers are Equally Good at Marketing and Company Research Some differences between marketing efforts of brokers include: 1) how extensive their pitch deck or “Confidential Information Memorandum” (CIM) will be (both terms used for the marketing package for a business), and 2) how much research they will do on buyers.
Some brokers won’t charge anything for marketing your business. But they typically produce a very scaled-down version of that CIM or pitch deck, and they won't do as much research on potential buyers.
Another big distinction between business brokers is the extent and expertise of pre-sale consulting offered.
We really want to represent what the business owner needs. Often when it comes down to selling, owners think they’re going to get this big price. We'll do a broker's opinion of value, based on what we think we can get for the business on the market. We'll include an after-tax calculation of expected sale proceeds, so owners are not surprised by how much they’re going to walk away with versus the price. This is a rough estimate, and we always recommend that sellers review it with their tax accountants, because we don’t know their personal tax situations. It’s still helpful for them to realize the impact taxes can have on their transaction.
As the seller, it’s most important that you get what you need, because you may be depending on this sale to fund your retirement or at least a part of it. And if the expected after-tax proceeds are a lot lower than you’ve been envisioning, it can make a big difference in your lifestyle.
We may also work with the business owner to build revenues and improve the books to help get a higher value, if they need that. We have a lot of financial and business expertise, so we can figure out changes the owners can make that can be help increase their business value. We worked with one recently that increased their value over $1 million in one year by making a few changes.
We Consider External as well as Internal Sales Options Sometimes the best option is to consider an internal sale, like to a key manager or group of employees. That should be something every broker considers, but sadly, a lot never do. I previously worked at a large business brokerage firm, where our only option for every business was to find an external buyer. Sometimes that's not the best solution.
Sometimes an owner may want to transition ownership and management of the business to a family member, an employee, or a partner. We'll even do ESOPs (employee stock ownership plans) if that’s the best option.
You may have also identified an outside buyer, maybe someone else in your industry who would be a strategic player, and you simply want help with that transaction. I often do these transactions. Because we don’t have to go through as much effort to find buyers, we can charge a little lower commission on these deals.
As consultative business brokers, we try to consider all of the potential sale options and what’s best to meet the owner’s needs. You may not know your best option, because maybe you haven't really thought it through. Is there someone on your management team (or a group of managers) that you might want to take over (or think they could take over), or do you know a strategic buyer that might be a great fit? We like to consider all these options.
Are You and Your Business Really Ready? When we do an assessment for an owner, we look at three things:
1. Owner readiness: what do you need personally? And are you really emotionally and financially ready to sell?
2. Business readiness: really taking a deep look at your business scenario and where you have weaknesses or strengths
3. Market readiness: the timing in the current market. Some of that depends on financial markets. Is there capital available to purchase?
So, a consultative broker usually goes far beyond what a more “transactional-focused” broker would do. We help find the right solution by considering all of the options, and help an owner prepare your business to maximize its value.
See the entire video here: https://www.youtube.com/watch?v=f8ZazhIs56w&t=2s