When selling a smaller business, business owners often consider hiring a business broker. This article, Part 1 of 2, highlights issues for business owners to consider in the sales process for a business expected to be sold at a price of $1 Million to $5 Million. Part 2 will focus on business broker agreement terms.
You are used to running your business, but you may not have the skills or contacts to sell your business. This is a very good reason to hire a broker. For a fee, a business broker will at a minimum introduce you to potential buyers for your business. Better business brokers, however, will do more for you than that, such as:
Attorneys, accountants, financial planners, and other business owners would be good referral sources. A few professional associations, such as M&A Source and the International Business Brokers Association (IBBA), might be helpful, too.
Doing some homework before you select a broker is important. Broker background issues to investigate include:
Many purchasers of smaller businesses will obtain a loan to buy your business, with Small Business Administration (SBA) loans being popular because of favorable interest rates charged for such loans. Though the broker represents you, a broker who is familiar with local SBA lenders and the SBA loan process can provide you with a significant advantage. The SBA requirements will typically not only have an impact on the buyer but also on you. These requirements can be a surprise to sellers. In a stock sale, the SBA often requires that the selling owner continue to own some equity in the business. In an asset sale, the SBA may require your entity to accept some of the purchase price pursuant to a promissory note from the buyer. The purpose of these requirements is often that the SBA lender wants to have you invested in the future success of the business post-closing.
A business broker for a business sale with a purchase price in the approximately $1 Million to $5 Million range may charge the seller a commission of 8-12% of the purchase price. The fee percentages tend to increase for sales below $1 Million, and decrease for sales over $2 Million. Many brokers also ask for an up-front fee to prepare marketing materials and otherwise ready the business for sale. These fees are typically in the $5,000-$10,000 range for a sale on the lower side of the mentioned range. An up-front fee can be worthwhile, but obtaining a detailed description in a broker contract of the services you will receive for that fee is critical.
A business broker that represents you in a sale of all or substantially all of the stock or other equity securities you own in the business must be licensed as a broker-dealer under the federal and applicable state securities laws unless an exemption from licensing exists. These laws may also apply if the broker represents you in a merger of your business. Federal law in this area has loosened and modernized in recent years as a licensing exemption now exists for some brokers of smaller-sized business sales. Most states, however, have not adopted a similar exemption, so obtaining appropriate legal advice in this area is necessary.
When real estate is part of the business sale, most states require that the business broker may only receive a commission for the real estate portion if they are a licensed real estate broker. The assignment of a real estate lease by the seller to the buyer could also raise real estate licensing issues.
Business brokers can be very helpful, particularly for a seller who has never sold a business before or whose industry may be quite specialized. Investigating the broker’s background, understanding what specific services the broker will provide, and identifying broker-dealer and real estate broker issues upfront are some of the keys to a successful relationship with a business broker.
Matthew A. Cole is Of Counsel at Earp Cohn P.C., where he advises clients on corporate, securities, commercial real estate, and business divorce matters. His practice includes mergers and acquisitions involving privately held companies, business formation and governance, commercial financing, and complex business transactions. Matt brings decades of experience counseling businesses and their owners, with a focus on providing practical, strategic guidance throughout the life cycle of a business.
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ATTORNEY ADVERTISING: This article provides readers with general information only. No attorney-client relationship is being created. Readers should obtain legal advice tailored to their specific needs and circumstances from an attorney with appropriate experience.
