Business brokers: pros and cons for buyers and sellers, how they get paid and what to ask

What does a business broker actually bring beyond a website listing, what do they charge, and who pays? In short, a broker finds buyers for a seller, charges upfront marketing fees plus a commission on completion, and is paid by the seller. That last point shapes everything: a broker can be useful to both sides of a deal, but they act for the seller, and buyers and sellers should weigh them up differently.

What is a business broker and what do they do?

A business broker is someone who finds buyers for the seller of a business. Some are large national firms, others are one or two people with a network in a particular sector, but their service typically includes the same four things:

• Marketing the business. Listing it online and promoting it to relevant buyers.
• Advising on value and list price. Telling the seller what the business is worth and what price to go to market at.
• Setting up calls and vetting buyers. Speaking to potential buyers to work out which ones are serious.
• Project managing the deal. Keeping the transaction moving as quickly as possible once a buyer is found. This is the part that sellers often underestimate and, in my experience, the part that matters most once the deal is under way.

How do business brokers get paid?

Brokers get paid in two main ways.

• Upfront marketing fees. When a seller instructs a broker, the broker typically starts by charging a fee to market the business. That is because the broker incurs expense in marketing the business whether or not it sells.
• Commission on completion. The second payment is a commission that is conditional on the business actually being sold, usually calculated as a percentage of the sale price.

If you are a seller speaking to brokers, be aware that they will typically ask for exclusivity. They want to be the sole broker for the sale of your business for a set period. So when you are choosing between brokers, ask each one what percentage of the businesses they take on actually sell, say, within 12 months of instruction. The answer tells you a lot about whether the marketing fee is likely to lead anywhere. A broker who lists a great many businesses but completes few of them is being paid mainly through upfront fees, and that is a different business model from one that is paid mainly on results.

Buying a business through a broker: advantages

If you are a buyer, there are three main advantages to dealing with a broker.

• Access to deal flow. The biggest advantage is access to the broker's database of businesses for sale, all of them with willing sellers. The alternative is sourcing your own deals and building your own list of potential targets from scratch, which is slow and uncertain.
• Insight into the seller. The broker is typically familiar with the seller and knows what matters to them. That makes the broker a useful source of information when you are structuring your offer. They may be able to tell you what kind of offer the seller is more likely to accept, and that is not only about the headline number. How much is paid on completion, the payment period and the security you are giving can all matter to a seller. Knowing that before you put an offer in can be the difference between an offer that is accepted and one that is dismissed.
• Project management. Brokers want to keep the deal moving so that they get their commission. That can work in your favour too, because project management is genuinely useful on a complex acquisition.

Business broker disadvantages for buyers

There are three main disadvantages for a buyer, and they all come back to who the broker works for.

• The broker represents the seller. The seller is their client. If you are looking to the broker for advice, there is a conflict, and you should treat what they tell you accordingly. They can tell you what the seller wants; they cannot tell you whether the deal is good for you.
• They want the price as high as possible. Brokers typically make their money on commission, and commission is a percentage of the sale price. The higher the price, the bigger their fee, so they are not neutral on the number.
• Time pressure. The broker's project management comes with a lot of time pressure, usually aimed at the buyer. For a buyer, being rushed is not always a good thing. Due diligence takes the time it takes, and pressure to skip steps is pressure to take on risk.

Selling your business through a broker: benefits

For a seller, the case for a broker is stronger, but it still needs to be weighed against the costs.

• Buyer screening. Brokers spend time setting up calls with potential buyers and vetting them to see whether they are serious and whether they can actually fund the purchase. They coordinate and arrange meetings and keep things structured, which saves you from wasting weeks of your own time on people who were never going to buy.
• A shared interest in a higher price. The broker wants your sale price to be as high as possible, and if they succeed, you benefit. An established broker with good connections may also invite multiple buyers to bid for the business. Buyers competing to give you the best offer can push the price up again.
• A better chance of finding a buyer. Unless you have extensive experience or connections in selling businesses, using a broker is likely to increase your chances of finding a suitable buyer at all.

Broker risks for sellers: fees and exclusivity

The disadvantages for sellers are the ones to read carefully before you sign anything.

• A quick sale, not the best sale. Brokers want the business sold for the highest price possible, but as soon as possible. They do not want to spend money and time marketing your business, see the exclusivity period run out, and then watch you find a buyer shortly afterwards without paying them commission. So they push for a quick sale, which is not always the best sale for you.
• Guaranteed fees, no guaranteed result. Like any marketing agency, a broker's marketing fees are payable up front in the vast majority of cases, and there are no guaranteed results. They cannot promise that your business will sell, and if it does not, the marketing fee is gone.
• Exclusivity. When you appoint a broker you sign an exclusivity agreement that obliges you to pay them if you find a buyer during the exclusivity period, regardless of how you found that buyer. Whether the buyer came through the broker or is a friend of yours, you will need to pay the commission. That is typically how the contract is worded, so read the exclusivity clause before you sign and understand exactly how long it runs and what it covers.

Should you use a business broker?

Brokers earn their fee when they bring you buyers you could not have found yourself, screen out the time-wasters and keep a deal on track. They cost you when the exclusivity terms are wide, the marketing fee is high and the pressure to close overrides your judgement on price. For a buyer, use brokers for deal flow and for insight into the seller, but get your advice elsewhere. For a seller, choose a broker on their track record of completed sales, not on the valuation they quote you to win the instruction. A flattering list price costs the broker nothing and can cost you months on the market.

Next steps

If you are selling, ask any broker you are considering what proportion of their instructions complete within 12 months, and have the exclusivity agreement reviewed before you sign it. If you are buying, remember that the broker acts for the seller and have your own corporate solicitor advise you on the offer, the structure and the timetable.