Business Brokers: Are They Worth the Fee?
You can sell a business yourself, but you may not get the best deal
Seth and Paul Hishmeh spent five years turning USAS Technologies, an IT consulting and professional services company in Louisville, Ky., into a $2 million business. In 2005, the brothers realized that there was nothing more they could do to expand it. And after considering an acquisition, they decided to sell.
In five months, they had found a buyer in New York, DAS Technologies. Seth continues as chief operating officer of USAS and his brother is exploring new opportunities.
The Hishmeh brothers got a deal they liked—though they decline to say what the sale price was—because they hired a business broker, bCatalyst Advisors, to sell the company. The broker was a local Louisville firm, but marketed USAS to potential buyers across the country. The marketing effort highlighted the fact that USAS was conducting business overseas in China and India through subcontractors. The broker also helped the brothers calculate more precisely the enterprise’s value in the market. Since the sale price was less than $3 million, bCatalyst negotiated a five-figure flat fee (brokers charge proportionately more for sales of small companies). But the Hishmehs are happy. “We didn’t know the ropes of selling a business and didn’t have the connection to any buyers,” Seth Hishmeh explains.
For most business owners, trying to sell a business without a broker is a mistake, says Rick Rickertsen, co-author of Sell Your Business Your Way and a managing partner at Pine Creek Partners, a Washington, D.C. private equity firm. Rickertsen recalls the case of Politics & Prose, a Washington bookstore. One day, a wealthy customer walked in and offered the two 60-something owners $1 million to buy the business. Without contacting a business broker or attorney, the owners sold and agreed to stay on to run the store. The new owner soon alienated the staff, triggering several resignations. The business began to suffer. Six months later, the two owners bought the business back, paying a $150,000, in addition to the $1 million, to get the store back.
How would a business broker have avoided this disaster? Among the key services that brokers are paid to provide is negotiating how the transition will take place. For example, in most deals, entrepreneurs sign consulting agreements to stay for one or two years to maintain customer relationships. These contracts often specify earn-outs, under which the sellers “earn” final installments of the sale price that are pegged to performance targets. Many owners also want to make sure that their employees are taken care of and the business continues to succeed. When it comes to finding a new home for your business, “compatibility and chemistry are important,” says Andrew McKay, president of bCatalyst.
Structuring deals that get a top price and meet all the other sellers’ needs requires extensive technical knowledge that most entrepreneurs don’t possess, says Rickertsen. “The business broker serves as the bad cop to get a better deal when due diligence or money issues arise,” he says.
Typically, business brokers evaluate the business, prepare sales material, develop marketing strategies, assist in due diligence of potential buyers, identify a seller and plan the transition to a new owner, says McKay. “We identify the positive aspects that drive or maximize value and identify the issues that a buyer would be concerned about,” McKay says.
For those efforts, brokers charge a range of fees. Most brokers charge what has become known as Lehman fees, devised by the investment bank Lehman Brothers. The scale goes: 5% or $50,000 on the first million, 4% of the second million, 3% of the third million, 2% on the fourth, and 1% for the fifth million and each million above. Those fees amount to $150,000 on a $5 million fee, but some brokers will charge a minimum $100,000 fee. However, for businesses that fetch less than $1 million, brokers usually charge 10% to 12%.
Business brokers are not created equal—like real estate brokers, some will bring in real prospects and some will wait by the phone. And the difference can be costly. Allen Gray, now a managing director at Sikich, an Aurora, Ill., consulting firm, says he got a bum deal when he sold his office products company, BMC Products, because he picked the wrong broker. The broker took nine months to produce a single bidder. “In business, we say one buyer is no buyer,” says Gray. In those months, the business slowed and Gray says he sold out for a fraction of what it had been worth.
A better broker, in fact, might have steered Gray away from selling at all. “If your business has peaked, you’ll get pennies on the dollars,” Rickertsen says. “Buyers are buying growth.” A good broker will act as a consultant and work with you to expand the business, enter new markets, cut costs and get the business in shape to fetch a higher price in a year or two.
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Finally, do not rely solely on a business broker. “Selling a business is a complex transaction that takes 9 to 12 months from start to finish and involves many skills including marketing, negotiations and financials. It’s important for a seller to assemble a team of business broker, M&A advisor, business attorney and accountant,” McKay advises.
