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Business brokers, also called business transfer agents, or intermediaries, assist buyers and sellers of privately held business in the buying and selling process. They typically estimate the value of the business; advertise it for sale with or without disclosing its identity; handle the initial potential buyer interviews, discussions, and negotiations with prospective buyers; facilitate the progress of the due diligence investigation and generally assist with the business sale.
Agency relationships in business ownership transactions involve the representation by a business broker (on behalf of a brokerage company) of the selling principal, whether that person is a buyer or a seller. The principal broker (and his/her agents) then become the agent/s of the principal, who is the broker's client. The other party in the transaction, who does not have an agency relationship with the broker, is the broker's customer.
Traditionally, the broker provides a conventional full-service, commission-based brokerage relationship under a signed agreement with a seller or "buyer representation" agreement with a buyer. In most states this creates, under common law, an agency relationship with fiduciary obligations. Some states also have statutes which define and control the nature of the representation and have specific business broker licensing requirements.
Agency relationships in business ownership transactions involve the representation by a business broker (on behalf of a brokerage firm) of the selling principal, whether that person is a buyer or a seller. The principal broker (and his/her agents) then become the agent/s of the principal, who is the broker's client. The other party in the transaction, who does not have an agency relationship with the broker, is the broker's customer.
In some U.S. states, business brokers act as transactions brokers. A transaction broker represents neither party as an agent, but works to facilitate the transaction and deals with both parties on the same level of trust.
Dual agency occurs when the same brokerage represents both the seller and the buyer under written agreements. Individual state laws vary and interpret dual agency rather differently.
Broker services vary widely depending on the practice and skill set of the broker. The most common services provided by a broker to a client are:
Perhaps one of the biggest services provided by brokers is the ability to allow owners to stay focused on running their business during the sale process, which can take on average 6 months to 12 months to complete.
The sellers and buyers themselves are the principals in the sale, and business brokers (and the principal broker's agents) are their agents as defined in the law. However, although a business broker commonly fills out the offer to purchase form, agents are typically not given power of attorney to sign the offer to purchase or the closing documents; the principals sign these documents. The respective business brokers may include their brokerages on the contract as the agents for each principal.
The use of a business broker is not a requirement for the sale or conveyance of a business or for obtaining a small business or SBA loan from a lender. However, once a broker is used, a special escrow attorney sometimes called a settlement attorney (very similar to a Real Estate Closing in practice) will ensure that all parties involved will be paid. Lenders typically have special requirements for a business related or SBA loan.
The market served by business brokers generally involves the sale of businesses with transaction values less than $10,000,000. Larger privately held companies are classified in the middle market and will employ firms that specialize in mergers and acquisitions (M&A). However, business brokers do participate in mergers and acquisitions activities when it involves a transaction between two or more smaller companies. Business brokers and M&A firms do overlap activities in the extremes of their market. These extremes are called the transitional market, or transmarket.
Upon signing a listing contract with the seller wishing to sell the business, the brokerage attempts to earn a commission by finding a buyer for the sellers' business for the highest possible price on the best terms for the seller. To help accomplish this goal of finding buyers, a business brokerage commonly does the following:
Business brokers attract prospective buyers in a variety of ways, including listing limited details of available businesses on their websites and advertising on the larger business-for-sale websites. Only in rare cases today does this extend to print media advertising. Brokers also directly approach prospective buyers and sellers to gauge interest. Most established business brokers have a large pool of prescreened buyer prospects - or know of other business owners - who have looked at other opportunities through the broker, but who are still actively searching to buy a business.
Although there can be other ways of doing business, a business brokerage usually earns its commission after the business broker and a seller enter into a listing contract and fulfill agreed-upon terms specified within that contract. The seller's business is then listed for sale, often on one or more business-for-sale websites, in addition to any other ways of advertising or promoting the sale of the business.
In most of North America, a listing agreement or contract between broker and seller must include the following:
There are three forms of brokers compensation: hourly, retainer, and success fee (commission upon a closing). A broker may use any one, or combination of these when providing services. The most common form of compensation is a success fee commission where the payment of a commission to the brokerage is contingent upon finding a satisfactory buyer for the business for sale, the successful negotiation of a purchase contract between a satisfactory buyer and seller, or the settlement of the transaction and the exchange of money between buyer and seller. Just as major investment banks normally charge a retainer for services, more business brokers have started to embrace this practice as well. The retainer helps cover the upfront costs incurred by the broker to perform services and shows a commitment on the part of the client (seller or buyer) that they are serious. Certain types of M&A transactions involve securities and may require that an intermediary be securities licensed in order to be compensated.
In North America, success fee commissions range from 5% to 12%. Usually, the smaller the transaction, the larger the commission. "Main Street" businesses, those with enterprise value between $100,000 and $5,000,000 can expect commissions to average between 10-12%.
Retainers, when charged, run from a low of $2,500 to as much as $25,000, usually related to the anticipated size and complexity of the transaction. They are usually non-refundable, but are most often deductible from the commission paid at closing. Commissions are determined between the client (seller or buyer) are normally paid at closing. The larger middle market transactions use the Lehman or the Double Lehman scales.
The standard commission is likely to be lower in the United Kingdom (see Lehman Formula). Commissions are negotiable between seller and broker. The commission could also be paid as flat fee or some combination of flat fee and percentage, particularly in the case of lower-priced businesses, businesses in the multimillion-dollar price, or other unusual business assets. The details are determined by the listing contract.
Out of the commission received from the seller, the broker will typically pay any expenses incurred to do the work of trying to sell the listed business, such as advertisements, etc.
All compensation to a broker paid by a third party must be disclosed to all parties.
In the US, licensing of business brokers varies by state, with some states requiring licenses, some not; and some requiring licenses if the broker is commissioned but not requiring a license if the broker works on an hourly fee basis. State rules also vary about recognizing licensees across state lines, especially for interstate types of businesses like national franchises. Some states, like California, require either a broker license or law license to even advise a business owner on issues of sale, terms of sale, or introduction of a buyer to a seller for a fee. All Canadian provinces with the exception of Alberta, require a real estate license in order to commence a career. According to an IBBA convention seminar in 2000, at least 13 states required business brokers to have a real estate license. The following states require a license to practice as a business broker: Arkansas, California, Colorado, Florida, Georgia, Idaho, Illinois (registration only), Michigan, Minnesota, Nebraska, Nevada, Oregon (only if real estate transfer is part of the transaction), Rhode Island, South Dakota, Utah, Wisconsin, and Wyoming.
Certain types of M&A transactions involve securities and may require that these "middlemen" be securities licensed in order to be compensated.