Looking for the pros and cons of using a broker when selling a business please.
Hello peoples,

A few questions from my partner and I, if you'd be so kind.

Firstly, we have an entertainment center we're looking to sell.  We have had interest and offers from folk that we know but are also debating having the property and business listed through a brokerage firm.  Our questions are these:

Do we even need a broker?  That sounds foolish to mine ears, but we bought the business without one, so I know it does happen.  When considering a broker will net nearly a six figure commission we won't see on the sale, we're curious what a broker brings to the equation that we're not seeing immediately.  Is it possible to agree to a selling price sans broker and then simply hire a lawyer at the end for paperwork and such?

In the absence of using a broker, what advice would you give the two of us regarding the execution of an NDA to protect the financials from leaking?  What advice would you give on how, if it's even possible, to vet prospective buyers to see if they're even remotely qualified to make a purchase between, say, 1.5 and 2 million dollars?  Granting that the first two issues are indeed feasible, what advice would you give on what to disclose and when (P/L statements, bank statements, valuations)?  

Lastly, is it unheard of, in the event we retain a broker, to structure the commission in such a way that if it's my partner and I that bring the buyer to the table versus the broker's listing, the broker receives a lesser commission since we've done the fishing and initial negotiations already?

Forgive the naivete, and feel free to offer questions of your own that we're simply not seeing.

Thanks so much.
[{"id": "cthzns5", "text": "I don't know how much business brokerage the people in this sub have seen, but I have a fair amount of exposure to SBA lending and thus a fair amount of brokered deals.  \n\nYou don't *need* a broker for a business sale, but the broker is your agent and should 1) source all your deals and 2) handle any and all bullshit that comes up from prospective buyers. If that time is important to you, hire a broker.  \n\nYou can definitely do the deal without a broker, but I would get with an attorney ahead of time (definitely one that has done a lot of business sales) and work out some documents - especially the contract or offer document. It will be in your interest to have the sales contract on your paper.  \n\nI'm not directly in sales, so I can't give advice on NDAs. You can probably ask your lender for advice on that.  \n\nAs far as vetting buyers, it's also something you would be paying the broker to do. If you're doing it yourself, you definitely want a resume and probably a bank statement or something showing worthiness. Most business deals are financed (brokers also get paid to place debt to close their sales) so that part is usually lock-step with getting a loan.  \n\nAny buyer is going to want to see 2-3 years of financials. Putting together a 'package' makes the deal more presentable, but isn't required. Valuations aren't going to mean much for any reasonable buyer (I don't care what you tell me it's worth, I will make my own determination). You do see seller valuations in business sales packages because often times you are dealing with people who aren't experienced in valuation or due diligence .  \n\nOn the lower commission issue, I have never heard of that, but doesn't mean it isn't possible. I imagine a good broker is going to ask you to let them do their job.   \n\nGL!", "replies": [], "depth": 1}, {"id": "cti7d5i", "text": "you don't really need one, but it can be useful.  You will want a lawyer anyhow to handle this.  Business transactions pretty much always get complex with transferring licenses, llc's, etc etc.  \n\nThe benefits to one you really pretty much seem to have laid out.  They will prequalify and identify buyers.  Business brokers tend to *sometimes* bring a bit more value than CRE Brokers IMO because (At least here) listings are mainly closed from the public.  A good business broker will be able to make more private connections and will be working with buyers he can expose it to that he already has connected with.  You can of course publicly list it any number of vague ways from \"midwest entertainment business\" to \"123 main st, gross sales x, profit y, asking xyz\".  \n\nPricing a business is going to be harder than CRE too.  Different industries are going to have different metrics.  Most business brokers here I'd consider good are busy people with lots of inside information and are typically cpa's or have a cpa on staff who can adjust/audit your financials.  If the value is nearly entirely in real estate, than a more traditional CRE broker may work fine.  Note business brokers charge a higher percent here than cre brokers.  Note not all business brokers will work with CRE brokers too.  CRE brokers will generally work with all other CRE brokers.  \n\nFor most business's for sale I've seen here its semi customary to list sales, then give some proforma type info after a NDA from a qualified party, then the rest when under contract.  This is highly dependent on how sensitive the business is.  Something like say a gas station where really no one gives a fuck usually is going to be vastly different than say an architecture firm or attornies practice where you would foresee clients not wanting to hire a business that is being sold.  \n\nAs per paying less if you find the buyer, I've seen similar things done in CRE, but have no real idea how business brokers see that.  When I've done that, its only a small reduction and typically tied to specific parties that were preidentified.  IE they had an employee thinking about buying it who has been on the fence already for a year who they think may decide to pull the trigger.  It would be unusual for you to be marketing the sale at the same time as your broker.  \n\nIf you do hire a business broker, be very careful who you chose!  I can't speak for all states, but in mine they aren't licensed or regulated at all.  You are going to run into guys like I mentioned who may themselves be attorneys or cpa's and have large books of business and experience right along side someone who decided they are tired of being a high school teacher and found someone pitching them the chance to pay them $500 to become a business broker and has no idea what they are doing.  \n\nI guess tldr if the value is all CRE get a CRE Broker.  It will be cheaper and they are probably more in tune there anyways.  If its not, and the business itself has significant value, go the business broker route.  \n\nWhat you get out of this is valuation help, negotiating help, them actually finding a buyer, them dealing with the shit ton of people who have $20 to their name but for whatever reason think god's plan is for them to somehow purchase a $2 mil business, them providing protection to your information, them being able to help you work out transition plans etc, and connections to other quality professionals you may need here (like lawyers/cpa's/etc).  \n\nedit-- also be aware if you hire a business broker you likely have no agency type relationship with them legally.  Make sure your lawyer looks at the listing agreement and be aware they represent whoever comes to buy the thing just as much as you.", "replies": [{"id": "cti9ioe", "text": "Thank you so much. \n\nCan you tell me if 2 is an appropriate multiplier for what he calls SDE (sellers discretionary.. expenses?), which I was understanding as free cash flow? He said he'd list the sale as X for the business (2 x SDE) + real estate/property. \n\nI understood this to mean that X = profit + officer salary/distribution and while he'd note what the property/land was appraised by the county at, the actual land/property value wouldn't be firm until the bank ordered appraisal. \n\nTo me, the multiplier on the business seems huuuuge. \n\nThanks again. ", "replies": [{"id": "ctibe8a", "text": "Seller's discretionary earnings I believe.  I think your definition is correct, basically whatever is left after he pays other staff + typical expenses.  \n\nThat can work fine for single operator type businesses.  For others it is a horrible metric.  One problem you run into with that, is sometimes you have a business that is actually LOSING money and worthless and that completely masks it.  Say for example you have a restaurant that is managed by the owner.  He pays himself 30k a year and clears 10k additional.  So you have SDE of 40 (I've also seen that called owners benefit and a few other things) so lets say that business deserves a 2 multiplier, its worth 80k right?  Well what if a market salary for a manager of that type of place is 75k a year?  Now you look at hiring someone and your NOI all of a sudden is -35k yikes!  That business isn't worth anything, it is a money pit and an albatross!  \n\nDifferent business types tend to lend to different metrics, some like gas stations really just go by sales, others like say a website or subscription service would put a lot of importance in # of customers or traffic.  \n\nOverall I like to adjust the financials for any non typical business expenses.  I usually ask the owner if they had to hire someone to replace them what would a going salary be, what personal expenses they class the business (do they lease cars through it etc?).  You figure all that out and adjust back to what the books SHOULD look like IMO then you base a value on that.  \n\nThere are way too many people out there under paying or grossly over paying theirself, of that have their wife come in and do all the ap/ar work 3 days a week and don't pay her a dime etc etc.  You need to make sure you are working with numbers where all that stuff has been fixed.  \n\nAs for if 2x is a good multiplier, I really don't know.  You should ask whoever told you that where they got it.  Most business broker comp reports I've seen list high/lows/averages and examples.  These shift around too based on performance and history.  If you have earned the same thing or with small inflation type increases for 20 years that is going to be treated tons differently than a business that has been around for 2 years and each quarter is all over the place.", "replies": [{"id": "ctifrm5", "text": "The business world be on par with a putt putt golf and arcade  and bar. That seems very similar to me.  Regarding the metric. I'll ask where he got it. Thanks so much", "replies": [], "depth": 4}], "depth": 3}, {"id": "ctj1t09", "text": "&gt; I understood this to mean that X = profit + officer salary/distribution and while he'd note what the property/land was appraised by the county at, the actual land/property value wouldn't be firm until the bank ordered appraisal.\n\nAlso I forgot to reply to this part and I think its important.  Yikes!  \n\nNo the value of the property according to the county assessors office can be all over the place.  It is a horrible estimate.  You can sometimes do this stuff based on appraised value but its not usually a great way to market it.  What is the approximate value of the property alone?  If no one has told you that, you need to talk to more people.  That property isn't going to be cheap to appraise.  It makes it very hard to sell if someone has to spend 10k+ and 2 months to work through the process just to find out what it will cost them to buy this.  Additionally, there are tax reasons both for you and the buyer where allocating certain amounts to the property or the business would make a difference.\n\nYou should interview a couple business brokers and commercial agents.  I don't want to say yours is bad, but you've mentioned several things that I find slightly off and like they are trying to do the minimum possible here.  \n\nOne thing I'd ask the CRE guys about is possibly either doing a sale leaseback of the land, then later selling the business, or selling the business, leasing the RE then marketing it immediately as an absolute/NNN investment property.  Depending on market, and strength of the business, you will most likely see a much better capitalization rate on the portion of this that is RE vs the portion that is business.  You need someone in your market to explain this to you, who has looked at this in more depth, but it sounds like the cap on your property would probably be something like 6-10% depending on lots of stuff.  Setting up a 10 year lease then dumping it is something to think about, as on the opposite side of this you have somewhere between a 25-50% cap on the actual business (using your brokers numbers).  This also opens up opportunities for someone to buy the business with less investment, which means you have more buyers.\n\nNote a business broker most likelly can't legally do that transaction, so if they tell you that is a bad idea they are just shutting that down.  If a CRE investment broker tells you this is a horrible idea, listen to them.  Most likely it be tough to finance as you have a special use property, and lord knows what the guarantor is going to look like, and it be in that higher range I mentioned, but it would still be something worth exploring and discussing IMO and maybe you market it both ways if you are looking to sell quicker.", "replies": [{"id": "ctj92b8", "text": "Definitely need more broker input. Thank you for your help. Tis getting overwhelming fast. ", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ctiegv2", "text": "Brokers are not required by any stretch. Any business that is remotely good at what they do should have a pretty good idea of who/what companies would be a good strategic fit (vertically, horizontally, or entry to offer new product to their existing mix)  - these are your target buyers. Find out who the owners are then email them with your marketing materials then call them. Your best fit is the company that can pay the most (assuming you are looking for a cash exit).\n\nThat said, good brokers can be worth their commission in getting better deal terms and pricing. Lawyer's will be required in any transaction - it is in the interest of both parties.\n\nWorried about leaked financials? Don't give them up. You will need to give up your Income Statement at some point but don't until you see and execute a Purchase and Sale agreement that you're interested in moving forward on. Also, make the buyer put down some earnest money ($2.0mm valuation, $25-50 earnest money is not unreasonable to ask for), this gets refunded if the deal falls through.\n\nIf you are worried about disclosure of financials don't put them in your marketing materials. What's important: revenue growth,  profit margins (gross and net), and operating expense ratios. An appraisal or broker's opinion of value, might be good if valuation is in question. Never mention your debt position unless it is assumable - nothing to gain here. Also, make sure to zero-out your cash balances - you'll want to close these accounts prior to sale and there is no reason for the buyer to get your cash. \n\nLooking for marketing materials / formats? Search for start-up offering memorandums and teasers. Teasers go out in the initial email. OM's only get circulated to interested parties that you deem to be real.\n\n", "replies": [{"id": "ctifnny", "text": "Didn't even consider closing accounts prior. Hopefully broker would have caught that. Thank you ", "replies": [], "depth": 2}], "depth": 1}, {"id": "ctjjf0y", "text": "The higher commission on a business sale (Typically 8%-12%) is because of the opportunity cost. We could probably close 3 CRE deals at 3% during the time it would take to close one business sale (and the biz sale would require 3x the work). \n\nThe value the broker is going to bring is finding an investor because that's what we do. If you already have a buyer then use a lawyer for closing and just pay fees.  ", "replies": [{"id": "ctjrj3e", "text": "Out of curiosity, are you at all able to take a stab at a gross % or fee to have a lawyer close?\n\nAlso I can't quite decide how to go fishing for valuation strategies to determine appropriate valuation metric without essentially asking brokers to answer questions for free..", "replies": [{"id": "ctklr89", "text": "I wouldn't know where to begin with an attorney fee. I would assume they just hand you a contract for an open tab and charge by the hour.\n\nThe only reason you would need a valuation is to set an asking price. The prospective buyer isn't going to care or put any weight on your valuation. They're going to need to see your books and determine for themselves what they think it to be worth.  \n\nMost companies biggest asset is their property, which is why they tend to use brokers for the transaction. Everything else is easy to determine through tax returns and P&amp;L's. \"Future profits\" and unrealized gains are worth a lot less to the buyer.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}]