There comes a moment when every entrepreneur thinks about hanging up his or her spurs and selling the business. If a competitor comes to you and wants to buy you out, then great. However, more often than not, it is the small business owner who has to go and find a buyer.
The question then is, should you use a broker to sell your business or try and do it yourself?
Why use a business broker to sell my small business?
The short answer is, to save you time. As any business owner knows, running a small business is a full-time job without your having to become your own estate agent as well.
However, another benefit is confidentiality. As an employer, you do not want to spook staff into thinking their jobs are at risk. Employing a broker helps keep things confidential, which avoids rattling staff or suppliers if word gets round.
Business brokers often approach rival businesses directly (the most likely buyers) talking up your anonymous business or harvest their own database of would-be buyers, as well as blasting out through social media channels.
Finding a buyer is often the easy part – it’s negotiating the sale price (which often bears no relation to the actual cash value as what businesses sell is potential), corraling the buyer and seller, overseeing the process, and dealing with the inevitable unforeseen kinks and bumps in the road along the selling process.
Tony Vaughn, managing director of broker Vexus, says: “Deep down, business owners think that someone is going to knock on their door and make them an offer they can’t refuse – but that doesn’t happen very often.”
Rupert Cattell, managing director Turner Butler, says: “Any fool can advertise a business for sale; the hard part is managing the sale process and getting a deal over the line. If you try to do it yourself, will find it a distracting and debilitating process. It’s unlikely you will be successful. Probably 60pc-70pc of deals fall over between the handshake and completion. And if you don’t have someone who knows what they’re doing, the failure rate is much higher.”
Tony Vaughan agrees: “If you’re selling your business for the first time, you won’t know where to start, you’re a little bit too close to it. It will be difficult for you to be objective.”
Henry Ziff, managing director of Transworld UK and MD of Transworld London, adds: “Typically, business owners are so busy day-to-day running their own business, firefighting, they’re not really thinking about their three or five-year plans and what a potential exit could look like. All we try to do is educate our potential sellers on how to sell a business.
“Ninety-five per cent of a deal is the transaction and 5pc is typically different or has a pain point.”
What does a business broker do?
A broker is like an estate agent, except they only sell businesses. Like an estate agent, the broker prepares particulars, advertises businesses for sale anonymously online and holds the hands of both parties.
Cattell says: “We advertise and promote a business for sale, we introduce buyers, and we endeavour to get buyers to make an offer at asking price, managing the sale process through to completion.”
Ziff says: “What we are able to do as business exit experts is manage the transaction successfully in order to achieve the right outcome. People go to their lawyers for legal advice and accountants for accountancy advice. We’re the same if you want to sell your business.”
How do you find a business broker?
Word of mouth is a good place to start. Your lawyer or your accountant have probably had dealings with brokers in the past and can make recommendations.
Of course, you can search online but because business broking is unregulated, buyer beware. You can sound out your broker by asking some probing questions.
Cattell says: “We like vendors to come to us rather than pull vendors towards us. We want to take on businesses we believe we can sell because that’s how we get paid.”
What questions should I ask when I sell my small business?
Always ask to meet the person who will represent you so you can meet the actual deal maker. Some businesses send in a slick salesperson who promises everything and then you never see them again.
- What is my business worth?
- Is there a listing fee?
- If they do charge upfront, what are you getting for your money?
- Have they worked in your industry before?
- What is their track record in your sector?
- What are their fees?
- What’s unique about them?
- What support structure or team do they have? Is it a single owner or a bigger team?
- Who are they going to target and what sort of buyer do they envisage? Where’s that buyer going to come from?
- How are they going to market your business?
- Ask for a written contract
What is my business worth?
This is where a business broker’s advice can be crucial. Yes, an accountant can run a slide rule over the past and come up with a figure based on turnover or profit, but what a broker often sells is potential.
Vaughan says: “There’s no such thing as a valuation. The worst thing you can do is get a number off your accountant. If you do it right, that number might be greatly exceeded. But there’s no second chances in this world, you have to do it properly.”
|Source: company interviews|
|No. of businesses for sale at any given time||100||250-300||18-25|
|No. of brokers in office||7||10||7|
|No. of busineses taken on during year||n/a||120-140||n/a|
|Avg. turnover of businesses for sale||£50,000-£100,000 up to £10m-£15m||£100,000 to £6m-£10m||£500,000 to £10m|
|Avg. sale price of listed businesses||2x profit||£400,000 to £2m||n/a|
|Avg. sale time (months)||8||14||12|
|Conversion rate %||20%||50%||n/a|
|Sector specialisms||any||light industrial||business services, software|
|Sectors avoided||gambling, adult entertainment||retail, pubs, care homes, children's nurseries||restaurants, hotels, factories|
|Documents needed||3 years of accounts, copy of any lease, supplier contracts, employee contracts, customer contracts||3 years of accounts||3 years of accounts|
|Commission %||12% (minimum fee £15,000)||8.5% (minimum fee £12,000)||5% on first £1m, 4% on second £1m, anything above £3m 3% + upfront retainer (deductable on completion)|
|Marketing channels:||database of 10,000 buyers, outbound and inbound online marketing, strategically targeting buyers||aggregator websites, own database of 70,000 buyers, contacts potential trade buyers directly, display ads in The Times and The Sunday Tiimes||approaches potential trade buyers directly|
The real value can be in future worth, not short-term return. And that can involve you being tied in to keep running the business. This is different to a house sale, which is never worth more because you agree to carry on living in it.
“If you remain involved for one or two years, you’re de-risking the business from the point of view of somebody buying it and they can afford to pay you more,” says Vaughan.
Beware of valuations that sound overly positive. If it sounds too good to be true, it probably is.
Ziff says: “It’s not a science, it’s an art. We do a variety of different methods and calculations based on comparables to come up with what your business is worth and what the business owner might feel its worth.”
According to Transworld, 2x profit is a good rule of thumb.
Cattell says: “It really is gut instinct. If you feel you’re being oversold, you should be pulling back. A professional business broker shouldn’t be gilding the lily. They should also be giving you a realistic price. A good cross-check is whether you, as a business owner, would pay this much for your business.
“There is no such thing as a dumb purchaser. Pretty much every purchaser will have looked at every business for sale and will be aware of what other businesses are being sold for.”
How much does a broker charge?
Some brokers want an upfront fee for selling your business; others sell businesses commission only.
One school of thought is that paying a broker upfront means they are obliged to work harder for you. If a broker just takes your business and posts the details online, the danger is they can put their feet up and wait for any offers to come in. If a sale happens, then all the better.
“Brokers that don’t charge upfront tend to have hundreds or thousands of clients,” says Vaughan. “It’s a numbers game. Throw enough mud at a wall and some will stick.”
The counter view is that if a broker charges upfront, sometimes this is their only business model – they take your money and kick back. This upfront fee could be anything from £2,000 up to £40,000. For them, it’s a numbers game of how many upfront fees they can collect.
Cattell says: “Their proposition is to confront vendors by cold calling them and pushing them hard. It’s all about as getting as many vendors as possible to get an upfront fee.”
Broadly speaking, any business selling for less than £100,000 should expect to pay up to 10pc of the total deal value as commission.
How does a broker do due diligence?
The first thing a broker should do is sit down with you to discuss strategy and where you see the business growing.
Cattell says: “We then spend around two hours with you going through a fairly forensic interview about your business. We try to identify all the key levers and drivers. Any problems or issues are going to come out in this process. We don’t want the purchaser to feel blindsided by us and there aren’t any skeletons in the cupboard.”
Brokers will want to see three years of accounts as a minimum requirement. They may also want to see invoices and any other information you can provide them. The more information you can provide upfront, the better to de-fang any problems.
Those handling a retail business will also want to see copies of any commercial rental agreement.
Vaughan says: “I want to understand what the bottlenecks are stopping growth, what the forward strategy is, how a buyer can double or quintuple turnover. Yes, history is important, but I’m more interested in the future.”
How long will it take to sell my small business?
You need to be prepared to wait anything between a year and 18 months for a deal to close. The good news is that any business that has opportunities or makes money will sell, providing you the owner are realistic. The bad news is that this will take longer than most business owners think.
Cattell says: “The most common misconception is the length of time it takes to sell a business. Some people think it will only between six and 10 weeks. In reality, it’s a complicated process with a high failure rate. The truth is that there are probably only ever two or three potential buyers for your business in any given year.”
Turner Butler says the real industry conversion rate of businesses being sold is 12pc.
Are any businesses easier to sell than others?
Retail is having a notoriously difficult time of it at the moment, with gaps on high streets and in shopping centres.
And businesses whose lunch is being eaten by the internet, such as independent car dealerships, whose customers are increasingly searching online sites, are also a difficult sell.
Where your business is located can also affect its sellabilty. It may be politically incorrect but small businesses based in the South East are more attractive than those elsewhere.
Cattell says: “Businesses where there are fewer chimney pots are more always more difficult or challenging because you’ve got fewer buyers. A business in the South East is going to sell a lot more easily than the North East, South West or in Wales.”
Vexus looks for a business that relies on a subscription digital model, rather than waiting for business to come in through project work. Software-as-a-service (SaaS), for example, is very attractive and will attract a premium.
Any business that relies on the knowledge or craft of the exiting owner is a difficult sale.
Transworld is probably the biggest global business broker franchise in the world. Founded in Fort Lauderdale, Florida in 1979, Transworld became the largest business brokerage in the US. Today, it has over 250 offices in 17 countries.
No. of businesses for sale at any given time: The London office has over 100 businesses for sale.
No. of brokers in office: seven in London office.
Avg. turnover of businesses for sale: From £50,000-£100,000 to up to £10m-£15m.
Avg. sale price of listed businesses: 2x profit is a good rule of thumb.
No. of businesses sold: Transworld UK closed over 1,000 transactions last year.
Avg. sale time: eight months
Conversion rate: 20pc
Sector specialisms: any
Sectors avoided: gambling, adult entertainment
Documents needed: Three years of tax returns, a copy of any lease, supplier contracts, employee contracts, customer contracts.
Commission %: minimum fee of £15,000 or 12pc commission, subject to completion.
Marketing channels: database of 10,000 pre-qualified buyers, outbound and inbound marketing covering online advertising, and strategically targeting specific buyers.
Memorable quote: “We try to do the due diligence upfront so we can package the business as best we can to find the right buyer. We’re completely aligned with our clients and relentlessly focused on selling their businesses. I love learning about people’s businesses, that’s my passion.”
Based in Ickenham, Middlesex, Turner Butler has over 30 years’ experience of selling businesses. Sectors it handles include IT and e-commerce, agriculture, transport and construction, manufacturing and engineering. Rupert Cattell, managing director of Turner Butler, has sold over 3,000 businesses personally in his career.
No. of businesses for sale at any given time: 250-300
No. of businesses taken on in any 12 months: 120-140
No. of brokers in office: 10
Avg. turnover of businesses for sale: £100,000 up to £6m-£10m
Avg. sale price of listed businesses: £400,000 up to £2m
Avg. sale time: 14 months
Conversion rate: 50pc
Sector specialisms: IT and e-commerce, agriculture, transport and construction, manufacturing and engineering
Sectors avoided: retail or retail leisure (pubs), care homes, children’s nurseries
Documents needed: three years of accounts
Commission %: 8.5pc on sale with minimum fee of £12,000
Marketing channels: posts businesses for sale on around 50 aggregator sites, also has a database of around 70,000 potential buyers with weekly mailshots, profiles individual potential buyers and approaches them individually advertises in The Times and The Sunday Times.
Memorable quote: “I’ve been selling businesses for 35 years and everybody in our organisation has an amount of grey hair or no hair. We’ve all been round the traps and we’re all over 45. There are no teenage girls hoping they’re going to be putting a sale together in our office.”
Between them, Tony Vaughan and his Vexus team have over 50 years of commercial business experience. Vaughan alone has spent 20 years either launching, buying or selling a number of businesses. He sees his background as an entrepreneur himself as being a strength when most brokers come from an accountancy background.
No. of businesses for sale at any given time: 18-25
No. of brokers in office: 7
Avg. turnover of businesses for sale: £500,000 to £10m.
Avg. sale price of listed businesses: Anything between £500,000 and £10m
Avg. sale time: 12 months
Conversion rate: n/a
Sector specialisms: business services, software, anything where the value lies in intangibles such as a brand or a customer database or IP.
Sectors avoided: property-based businesses such as restaurants, hotels or factories
Documents needed: three years of accounts
Commission %: 5pc on the first £1m, 4pc on second £1m, 3% on everything above £3m. Also charges upfront commitment retainer, deductible from fees on completion.
Marketing channel: mainly contacts trade buyers directly after researching the market as to who might be interested in acquiring a business.
Memorable quote: “Despite the doom and gloom when you turn the TV on or when you open your newspaper, the mergers and acquisitions market is as buoyant as ever. If you’re a bigger company with investors and shareholders, you have to deliver growth. There are only two ways a bigger company can grow, either organically or by acquisition. If you’re struggling with organic growth, then you have to buy.”