Should I use a broker when buying or selling a business?

Understanding the broker/client relationship is key when taking on a broker to buy or sell as business, as Jo Thornley reveals in this piece.

Employing a business broker to represent your interests when buying or selling a business could be a smart move in most circumstances.

After all, someone who is involved in the cut and thrust of such deals on a daily basis is sure to have the expertise and judgment that will be to your advantage.

Yet, for the prospective buyer or seller, getting the best out of any such arrangements will depend to a great extent on your own thorough understanding of the broker/client relationship. Here are some things you really need to know.

Buyers

The pros of using a broker when buying a business

When you are looking to buy a particular type of business, a broker will be happy to take all of your desired criteria and search the market on your behalf.

And if, as is likely, you have a range of very specific requirements, your broker will understand where to look for these businesses, and how to filter out the ones likely to prove unsuitable and/or small business owners who may turn out to be unreliable.

It may also be the case that your broker has contacts in allied professions he can quickly refer any important matters – legal or financial issues, for example – which could potentially influence your decision to purchase.

At its best, a broker looking after your interests in such a way would provide an invaluable service.

Usually it makes more sense to work with a broker local to the area in which you hope to purchase.

It’s also wise to time limit your client/broker contract to give yourself an opportunity to review progress after 30 or 60 days.

The cons of using a broker when buying

First of all, you must clearly establish the detail of your broker/client relationship. A broker usually receives commission for selling a business, and therefore represents the seller.

No broker can (impartially) represent the joint interests of buyer and seller – so walk away from any that claim to do so.

That means you must be sure your broker has no vested interest in selling any particular business, and you will also have to agree some fair method of paying them for their services.

“A broker can make the whole acquisition and transaction process a lot easier”

It’s unlikely that a generalist broker with no direct knowledge of your field of interest would be very useful, and in such circumstances, you could technically end up paying for something you could really do yourself.

However, if your broker is a specialist in your sector, then his advice, ‘insider’ knowledge and contacts may secure you a good deal which is sound in every respect.

Try to be clear about how broadly your broker will search the market – your options may be quite limited if he only searches his own database, and, of course, he will also have a (potentially compromising) pre-existing relationship with such sellers.

Sellers

The pros of using a broker when selling a business

Preparing your business for sale can be an arduous and potentially overwhelming process.

So, having a professional at hand to look after your interests is always a bonus. For the seller, broker services are usually ‘written into’ any contractual relationship in the form of a commission once the business is sold.

Therefore, it’s quite unlikely you will have any reason to doubt your broker is acting in your best interests.

The cons of using a broker when selling

Entrusting the sale to a generalist who doesn’t understand the detail of your business is never particularly helpful, and also has the potential to leave you with legal liabilities.

And while pushing for a good price is what you would expect any good broker to do on your behalf, never let a broker convince you that your business is worth more than it’s valuation.

Such unprofessional behaviour will leave you open to embarrassment when challenged by a buyer’s due diligence team and may lose you a sale altogether.

Naturally, your broker will want to get a deal done in order to get paid. But while that’s a great incentive for both of you, be sure you don’t part with your business for a lot less than it’s really worth.

While this will still gain your broker a sale commission, it may damage your future plans.

Related: How to sell your small business through a broker

So, whether you are buying or selling, a broker can make the whole acquisition and transaction process a lot easier.

And in most instances, using a broker will also help to ensure the outcome of the exercise is very much in line with your desires and expectations.

Jo Thornley is head of brand and partnerships at Dynamis.

Joining in 2005 to co-ordinate PR and communications and produce editorial across all business brands, she earned her spurs managing the communications strategy and now creates and develops partnerships between BusinessesForSale.comFranchiseSales.com and PropertySales.com and like-minded companies.