How to be a Business Broker

A business broker is a person or firm who/which acts as an intermediary between sellers and buyers of small businesses.

Business brokers, also called business transfer agents, or intermediaries, assist buyers and sellers of privately held small 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.

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 creating under common law an agency relationship with fiduciary obligations. Some states also have statutes which define and control the nature of the representation.

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.

In some states of the USA, 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. Most states that operate business transactions as Transactions Brokers also operate Real Estate transactions as Transaction Brokers.

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:

• Assist client in establishing a MPSP Value - Most Probable Selling Price Valuation; the techniques used by individual brokers can vary greatly in this process
  
• Develop a comprehensive Information Memorandum on the company; normally a 15-30 page document outlining the business for potential buyers
  
• Conduct buyer searches
  
• Exposure - Marketing the business to prospective buyers
  
• Screen buyers for ability to complete a purchase
  
• Coordinate negotiations and provide deal structuring advice
  
• Provide overall deal management to guide the client through the entire process
• Help maintain confidentiality of the sale
  
• Hourly Consulting for a fee, based on the client's needs
  

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 be take on average 6 months to 12 monthes to complete.

There are three forms of Brokers compensation; hourly, retainer, and success fee (commission upon a closing). A Broker may use any one, or combintaion 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 covers the upfront costs incurred by the broker to perfom services and shows a commitment on the part of the client (seller or buyer) that they are serious. Certain types of merger and acquisitions 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 revenues between $100,000 and $1,000,000 can expect commissions to average bewteen 8% - 12%. Commissions are determined between the client (seller or buyer) and their broker and are normally paid at closing.

The standard commission is likely to be lower in the United Kingdom (see Lehman scale). 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 multi-million 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 businesses, 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. According to an IBBA convention Seminar in 2000, at least 13 states required Business Brokers to have a Real Estate license. The following require a license to practice as a business broker: Arkansas, California, Colorado^[2], Florida, Georgia, Idaho, Illinois, Michigan, Minnesota, Nebraska, Nevada, Oregon^[3], South Dakota, Utah, Wisconsin, and Wyoming.

Certain types of merger and acquisitions transactions involve securities and may require that these "middlemen" be securities licensed in order to be compensated.