Buying a business: agent or broker?

13 November 2007
Page 1 of 4 : single page

The main parties involved in buying or selling a business or franchise are business brokers, accountants and lawyers. The business broker is the acting agent for the seller of the business, although he or she must also exercise a 'duty of care' to the buyer. Both the seller and the potential buyer of course will each have their own accountant and lawyer to act for them.

1. Business brokers

What Is A Business Broker?

A business broker or a business agent is a person or firm, which arranges for the buying or selling of businesses on behalf of a client. The business broker is a specialist with a range of skills, which have been developed over many years of dealing in his or her profession. Some business brokers are accountants and therefore are able to help a client even further because of their professional experience and knowledge.

One of the biggest advantages in using a business broker is that he or she becomes the go-between between the buyer and the seller. The parties generally allow a lot of emotion to be involved in the transaction so the broker acts as the buffer between the two to keep everything on a down to earth basis. Often a buyer may ask a question of a seller and get an answer, which is less than honest, which can cause the buyer to view the situation, as being suspect and the deal can easily be lost. A business broker has the experience and the training to allow communication to flow freely between the parties and keeps the whole transaction under control.

Using a business broker

The main function of any business broker is to bring the buyers and sellers of businesses together.

A professional business broker is the best person to see if you are looking at buying a business. The business broker has been engaged to work for the seller of the business but, in dealing with the buyer, they have a duty of care so need to ensure that the buyer is not ripped off but that all the information passed over is correct in the sense that it is the information supplied by the seller.

A business broker ensures that everything is done discreetly and that confidentiality is maintained throughout the whole process. A business broker also acts as the intermediary in the sense that the identity and details of the buyer are not revealed to the business owner until such time as the business owner is happy to do so.

The broker works on a commission basis so there is no cost to the buyer of the business. The buyer, however, must take into account that the broker is concerned with getting the best price possible for the seller and the buyer must assess whether this has any relevance in the negotiations.

Who does the broker work for?

The seller of the business usually appoints the broker and therefore his responsibility is to their client. However, the broker is also dealing with the buyer and has under law a duty of care. So, while they work for the seller, they also have to look out for the buyer. Even if the buyer befriends the broker and builds a friendly social relationship, the broker will still have to retain a legal responsibility to the seller as their client, and must disclose all relevant details that come to them about the transaction.

What can a broker do for you?

If you are thinking about buying or selling a business, the broker is invaluable. Here are some of the things that a broker can do to assist you in that regard:

They have a better idea of the marketplace and therefore are able to put together a sensible strategy for marketing the business.
They can act as the go-between and put together interviews with prospective buyers as well as qualify them before they get to meet the seller.
They will keep the seller informed of what reaction is coming through from the market as far as the business itself is concerned, as well as the asking price.
They can help to justify the asking price by bringing in other information relevant from the marketplace.
They will only pass through to the seller those buyers that have been fully qualified as to ability to complete the purchase as far as finance is concerned, as well as experience to be able to continue the operation.
The broker is generally there to ensure the smooth completion of the transaction for the seller and covers all areas that are needed in completing the deal between the buyer and the seller.
The broker is generally a professional whose main objective is to help clients buy or sell their businesses. They are familiar with the market conditions, as well as the appraisal requirements for the business price and the selling process involved in the full deal. They know how to market the business, how to talk to prospective buyers, and how to structure any offers so that both parties come out satisfied.
The broker can contact other likely purchasers on his books or that they know of and therefore structure a sale quickly without even having to market.
The broker is able to handle everything on a strictly confidential basis so that your privacy is maintained.
The broker may have access to investors and other parties looking for businesses.
The broker can handle the transaction without letting your employees know that the business is for sale.
The broker is able to carry out their duties without your suppliers and customers being aware of your intentions.
The broker is able to obtain information about the industry, as well as competitors, without them knowing that the business is for sale.
The broker will see the whole transaction through from step one to completion and will only close the file when you, as the seller/client, are satisfied.

Business brokers' fees

The client who is the seller of the business generally pays the fee. Most business brokers will require that you give them an exclusive agency for a period of time so that they are able to devote their time to selling your business.

Brokers' fees will vary between companies, but they may range from 4% to 10% and sometimes more, depending on the sale price of the business. If the business is a large one with a high price, then there is room for you to negotiate a better fee basis than the fixed percentage. For example, if the broker's fee is generally 5% of the sale price, then you may be able to reduce that down to 3% for a business that is worth over a million dollars.

The fees are generally paid at closing when the buyer settles the payment of his business and the funds are with the seller's solicitors. What happens is that the broker generally takes a deposit from the buyer when he puts in his offer and that deposit is held in the trust account of the broker. After the matter is settled, then approval is given for the fees to be deducted from the deposit held by the broker and any money left over is sent to the vendor or the vendor's solicitor.

It's the age of the professional

The best business brokers are professionals. They remain in business only if they possess credibility. They act within the law in the best interest of the vendor/client. They also appreciate their obligation to the buyer and must never forget that today's buyer is tomorrow's seller. If looked after, the buyer and seller will continue to buy and sell through the same broker. Never oversell. It's not good policy. A good broker always tries to ensure that both parties are obtaining value for money in the deal as well as top professional service.