Buy-Side Business Broker: Hiring a Business Broker to Buy a Business
So you want to buy a small business. How do you figure out whether there are underlying risks to the business? If you’re getting the best financing terms? Are you overpaying or is the seller playing one buyer against another?
The most skilled entrepreneurs often don’t have the expertise to source or evaluate an acquisition. But, hiring the right buy-side business broker can help you navigate the acquisition process and get you safely to the finish line.
What Is a Buy-Side Business Broker?
A buy-side business broker acts as an intermediary, representing the buyer in a sale and is responsible for identifying and evaluating potential acquisition targets, as well as negotiating and facilitating the transaction.
Though the exact responsibilities of a buy-side business broker depend on the size and complexity of the transaction, buyers generally contract with brokers for help with the following:
- Develop a list of acquisition criteria
- Source and screen potential acquisition targets
- Manage communication between buyer and seller
- Work with attorneys and CPAs to conduct due diligence
- Provide fairness opinions, working capital reviews, and other valuation services
- Assess the fit between the acquisition target and a buyer’s existing business in a merger
- Negotiate the sale
- Source financing options
- Set up escrow for the transfer of funds for closing
- Coordinate closing the deal
Some buy-side business brokers enter the picture after the buyer has identified an acquisition target. Others, especially in middle-market mergers, might stick around following the close to integrate the new company into the existing business. It all depends on the needs of the buyer, the type of business acquisition, and what the buyer negotiates with the broker.
Why Hire a Business Broker to Acquire a Business?
The first reason to have buy-side representation is to level the playing field between you, the business buyer, and the seller. Sellers typically use brokers to represent their interests. Even if you’re not a first-time buyer, do you want to match wits with a professional who buys and sells businesses all day?
There are many other reasons to hire a business broker. A broker will:
Uncover more opportunities than you’re unlikely to find on your own. Approximately three out of four businesses on the market are not actively listed for sale. Business brokers use research, their network, and extensive business databases to source all potential opportunities, in addition to listing services, to ensure you have a variety of options at your disposal.
Keep you from getting buried in paperwork. The sale process involves a mountain of paperwork, from the sale and loan documents to the records that must be reviewed during the due diligence. Keeping track of it all is a full-time job, and a broker will manage it so you don’t have to.
Take any heat that arises between you and the seller. During the sale process, you might want to ask for something the seller doesn’t want to provide, take a hard line in negotiations, or even rescind an offer. Leaving those uncomfortable discussions to a broker allows you to maintain an amicable relationship with the seller post-close. That’s an important consideration because the seller will most likely train you following the sale. You’ll also want to be on good terms with the seller if an issue related to the representations and warranties comes up post-sale so you can resolve it quickly.
Have your back. The seller’s broker has the seller’s best interests—not yours—in mind. Having your own broker ensures that they’re only working for you and advancing your interests. (See below for a few caveats to this notion.)
How Are Buy-Side Brokers Compensated?
Most business brokers work on commission. It’s called a success fee in business sales parlance, and it’s paid at the successful conclusion of the sale.
Success fees can range anywhere from 5% to 15% of the sale price of the business, depending on many factors, such as:
- Size of the deal (the percentage generally decreases as the deal size increases)
- Degree of specific industry expertise required
- Services provided
- Market conditions, such as competition among brokers
Fees are always negotiable, but remember that negotiating a bare-bones fee might also get you stripped-down service.
Who Pays for the Business Broker?
In most cases, the success fee is paid by the sell side. Often, the sell-side broker arranges to split the success fee with the buyer’s representative on a 50/50 basis. This arrangement is known as co-brokering. While this might sound like a great deal for you, the buyer, it might work against you.
For one thing, the buy-side broker’s compensation in these cases depends on the commission rate the sell-side broker negotiates with their client. If the rate is low, your broker might feel like the commission won’t be worth the effort and might not work very hard for you.
Compensating a broker based on successfully closing a deal works well for the seller. Not so much for the buyer. It’s in the seller’s best interest to close the deal quickly and for the highest purchase price. But as a buyer, you want a broker who’ll find you the right business. Paying a buy-side broker based solely on closing the sale not only shifts the focus away from finding the right acquisition for your needs, it also discourages your broker from negotiating the lowest sale price.
That’s why it can often be more beneficial for business buyers to foot the cost of hiring a broker and use an alternative to success fees (or in addition to success fees) to pay them.
Consider other methods besides or in addition to, a success fee to compensate a buy-side broker.
Pay the Buy-Side Broker a Flat Fee
Flat fees are typically used to compensate brokers assisting with selling a small business valued under $100,000. But this method can also be used for buying larger businesses or when the seller’s broker won’t use a co-brokering arrangement.
As with other compensation methods, the flat fee amount is negotiable and depends on the work involved in buying the business. Most often, a buy-side flat fee ranges from 2% to 5% of the price of the business. As with other payment methods, the percentage decreases as the sale price of the business increases.
Paying the Buy-Side Broker Directly for Specific Services
Because the acquisition process has many moving parts, some brokers charge separate fees for individual services. These additional fee arrangements can be used alone without a success fee, in addition to a co-brokering success fee, or with a success fee paid directly to the broker by the buyer.
Upfront fees. Upfront fees are typically used to cover the research costs or other advisory services a broker might provide. Upfront fees usually range from $2,000 to more than $10,000 and are usually non-refundable.
Retainer fees. Retainers are similar to upfront fees except that they are normally credited back to the business owner at the close of the deal when the success fee is paid. Retainers are most often used by mergers and acquisitions advisors.
Due diligence fees. These fees compensate brokers for their time and effort conducting the due diligence process and to cover the cost of hiring lawyers and financial professionals. Depending on the complexity of due diligence, these fees can range from $30,000 to more than $100,000.
Consulting fees. These fees might be applied when a broker or M&A advisor provides advisory services such as market research or strategic planning for the acquisition.
Valuation fees. These fees are used to cover the time and costs involved in conducting a business valuation.
Compensating E-Commerce, Real Estate, and Other Specialist Brokers
When specialized industry expertise is needed, it can be a significant factor in a broker’s compensation.
Brokers specializing in the sale or purchase of e-commerce companies are typically paid a success fee of 5% to 15% of the purchase price of the business by the buyer. They might also charge an onboarding fee, similar to upfront fees, to cover expenses such as research and other services.
When you’re buying a business that includes real estate, you might also hire a real estate broker to handle the real estate purchase. Commercial real estate brokers typically earn commissions of 6% of the price of the real estate.
What to Look for When Hiring a Buy-Side Business Broker
As you would when hiring any professional, look for a buy-side business broker who has worked with clients whose situations are similar to yours.
No formal training is required to become a business broker, although some states require a real estate license. Because some business brokers don’t have formal credentials, you’ll have to develop your opinion of their qualifications and suitability to your needs when choosing the right business broker.
Consider these factors:
- Years of experience. The devil is in the details when it comes to a business sale. A broker with substantial transactional experience can anticipate problems and solve any that arise.
- Industry expertise. Depending on your needs, you might also want a broker with specific industry experience.
- Professional memberships. Membership in professional organizations indicates the broker’s dedication to the profession.
- References. Checking the references of the business owners a broker has worked with will help you gauge not only whether they did a good job, but the way in which they work. Ask references about such traits as their frequency and communication methods, listening skills, and responsiveness to client requests.
Visit BizBuySell’s Business Broker Directory to find a buy-side broker to represent you in buying a business.