The non-answer – answer… “It depends”.
Okay, on what?
The time required to sell a business depends upon the industry, location, price, size, profitability, and yes, which firm you select to represent you.
Business Brokerage Press annual survey of business brokers in 1992 found the average time to sell a business was 4.8 months. In 2014 survey results were just over 12 months. Note that this only accounts for businesses that sold. The increase in time is likely attributable to perceived difficulty in buyer financing. Note “perceived”.
ENLIGN’s 2014 closings were heavily concentrated around 7 months, with outliers from less than 1 month (not common) to 14 months.
Virtually every business broker and business brokerage firm charges a commission at the time of closing based upon the purchase price. The industry likes to call this charge a “Success Fee” – presumably because it sounds better than a “Commission”. However, that’s what it is – a fee paid to the broker for managing a transaction through closing.
The percent ENLIGN charges is 10% on transactions up to one million dollars. That represents a $100,000 commission for the sale of a million dollar business. Sound outrageous? It’s not really. For two reasons. The first is the doctor analogy. When you go to see a doctor you aren’t paying for his time, you are paying for his expertise. You want to feel better and live longer.
In a business sale scenario you want your business to sell. Selling a business is extremely difficult with many many moving parts (which is why we love it so much). An experienced broker will insure you receive the maximum market value, minimize the time required to close, reduce your stress and most importantly actually SELL your business. Earlier this year we negotiated one term that increased the sale price by over $400,000 – almost completely covering the commission paid on the entire transaction with that single term. An experienced broker brings more value to the transaction that their fee – not subjectively, but literally.
ENLIGN, unlike most main-street business brokers also charges a retainer (usually $2,500) that is subtracted from the commission at closing. See the related FAQ on retainers.
Here’s the set up…
A business you are interested in is listed for sale for $900,000. You’ve completed your due diligence and it looks interesting – right industry, right location, right valuation – you’re thinking about making an offer.
The Seller also has the building that the business operates from for sale. The asking price is $1,100,000 and that seems reasonable considering the location, size and condition. You know the commercial property will be sold based upon its actual current appraised value so the price isn’t the concern, but the impact on cash flow to service the additional debt (over double) seems daunting.
Before throwing your hands up consider the following.
In most cases a commercial lender WANTS to loan on associated commercial property because it increases their collateral base increasing your chances for approval.
There is a lesser known program via the SBA that allows a commercial lenders financing the acquisition of a business and related commercial property to receive a term of 25 years – 15 years longer than a business only 7a loan if the real estate is 50% or more of the total loan amount. If the property is less than 50% of the combined loans the term is calculated from the relative price of the business vs. the commercial property.
So what does this mean? Well, an SBA 7a business only acquisition loan is amortized over a ten year term with 10% down at 6%. A $900,000 business acquisition transaction would carry a $8,992.66 monthly payment.
But, what if you purchased both the business and the commercial property which now requires a 25% total down payment with ~10% of this amount Seller note on full stand-by and 15% Buyer down payment (5% more on both loans). If the total project was $2,000,000 the payment based on a 25 year term at 6% would be $10,953.12 or $1,960.46 more per month. That intuitively seems like about $24,000 fewer dollars in your pocket over the next 25 years right?
Wrong. Because we haven’t considered the cost of renting if we don’t buy the building. There is going to be one or the other – rent or mortgage payment. We know what the incremental mortgage payment is ($1,960.46) but what would the rent likely be?
The answer is at an 8% CAP rate the rent would be $7,333.33 per month (ignoring CAM, taxes, insurance, maintenance, etc.) or $5,372.87 rent savings per month. That’s $1,611,861.00 more in your pocket over the next 25 years not to mention the probably appreciation in value of the commercial property.
So, if the buyer can afford the $210,000 ($45,000 additional down payment for the business portion plus $165,000 for the building in this example) in virtually all cases you can see that it more than makes sense to purchase associated commercial real estate when purchasing a business.
It’s very unlikely. This is a trick used by brokers trolling for new listings. Everyone gets the same letter and they wait to see who bites.
Most times the broker has a generic buyer that they use liberally as being interested then mass mail to hundreds if not thousands of business owners without regard to location, industry or price point. They are buying a list and rolling the dice.
Those that respond are asked to sign an exclusive representation agreement. When the ‘buyer’ doesn’t work out they have you committed to a 12 month exclusive agreement.
If they really had a legitimate buyer for your business wouldn’t you expect them to call you directly and set up a meeting? After all we’re talking about a transaction of hundreds of thousands if not millions of dollars.
I love to call back and ask “What industry is the client you wrote me about interested in?” I’ve never once had a broker be able to answer this question because they don’t really have a buyer. They flounder around with “lots of buyers”, etc. etc. They are always embarrassed when they realize they don’t even manage their direct mail list well enough to remove “ENLIGN BUSINESS BROKERS”!
ENLIGN has never used this tactic and thinks it’s one of the many unethical methods used by business brokers that give the industry a bad reputation. Why would anyone with integrity want to start a business relationship with the lie “I have buyers for your business”?
When ENLIGN is representing a buyer we contact the owners of target businesses personally and directly – not by mass mail.
Don’t fall victim to the direct mail trolls.
Here’s a quick FAQ to provide a heads up to potential business buyers and sellers.
When looking at the current listings being marketed by the brokerage firms you are considering be wary of excessive superlatives and over reaching claims. If every other listings sounds like the best business ever you might want to turn your “BS” meter on.
Do the listing titles include words like “Perfect”, “Stunning”, “Unbelievable”, “Booming”, “Thriving”, “Amazing”, “Awesome”, “Incredible” and my personal favorite “Recession Proof”? Are you being told this is a “Once in a lifetime opportunity” or that this is your only chance to “Get in on the ground floor”? Be wary.
Sometimes one of these is appropriate, but if you see these superlatives being over used you should be extra cautious when reviewing financials and other materials produced by the broker.
If the business broker and seller are willing to exaggerate the first information viewed by potential buyers there is a good chance that other important information has been exaggerated as well – potentially having a material adverse impact on the true value of the business.
The best business description ever is one that accurately presents the information about the company for sale to prospective buyers. No business is perfect. It’s important that the business description be interesting enough to attract prospective buyers while providing accurate and factual information that buyers, lenders and underwriters can rely upon.
Have you seen some of the new “business broker” websites popping up? It appears there are a new crop of individuals calling themselves business brokers out there. You can identify them by the lack of listings. Some don’t even have a real contact person’s information displayed on their website.
People come in and out of industries all the time and we all have to start somewhere right? What scares us is the lack of training and experience we’re seeing and individuals claiming they are “experts” in areas that they aren’t and connected and networked in industries that they are not.
Why so many so quickly? We suppose it’s because many people have been professionally displaced and see business brokerage as a quick and easy way to make a buck. (We assure you it isn’t) and that is proven by the generally accepted stat that ~80% new business brokers start with little or no training and ~50% of business brokers leave the profession in the first 12 months while ~80% of new business brokers never make it to year three! (Source: franchised and independent business brokerage / merger and acquisition practices and industry associations.)
You don’t want your business broker to close up before your project is successfully completed!
Hire a firm with tons of experience and references with years in the business. Don’t retain someone who doesn’t have the credentials, support systems and network. The sale of your business is too important for a new broker to use as on the job training.
Your business is one of your most valuable assets. Require that your representative be active in the IBBA and M&A Source. There are many to choose from around the country and ENLIGN is proud to have two of only seventy seven Merger and Acquisition Master Intermediaries in the world.
Entrepreneurs often get the advice from their lawyers and friends to require that a Non-Disclosure Agreement (NDA) or Confidentiality Agreement (CA) – NDA’s for the remainder of this FAQ – be signed before disclosing anything about their new venture/idea/product/etc. Most professional advisors hate them, and refuse to sign them. Here’s why:
An experienced business broker / M&A advisor will ALWAYS secure an NDA from all prospective buyers in advance of releasing any of your confidential information. It’s literally step one when engaging a new prospect on your behalf. It’s their job to disclose appropriate information at the appropriate time to appropriate individuals (i.e. those that have signed their firms NDA). It doesn’t make sense for the person you have representing you to sign their own NDA.
Another reason professional advisors hate being asked to sign NDA’s is that it gets complicated fast. The most sought after advisors talk with over 100 prospects per year. If you signed NDA’s with everyone it wouldn’t take long before the advisor was so limited in who they engaged due to conflicts that they would be out of business.
In summary, if the individual is not familiar to you and poses a competitive risk an NDA is appropriate. If the individual is a professional advisor (Attorney, CPA, Business Broker, M&A Advisor, Venture Capitalist, Angel Investor, etc.) it is generally inappropriate – especially if you are reaching out to them for advice and counsel.
If you are totally risk-averse, then push to always get signed NDAs. Chances are the most experienced and valuable contacts will choose to pass.
Lastly, professionals like the ones listed earlier are in the business of doing transactions. They trade on their experience, networks and reputations. There is little, if any, incentive to violate a prospects confidentiality or trust.
These are the all imprtant designations that you should not only look for, but REQUIRE that the broker who represents you has completed.
ABI = Accredited Business Intermediary. This is an entry level designation provided by the ABBA = American Business Brokers Association. Total cost approximately $1,000. Total time approximately 4 intense training days.
CBI = Certified Business Intermediary. This is the most recognized business brokerage designation worldwide and is provided by the IBBA = International Business Brokers Association. Total cost approximately ~$7,000 and then ~$3000 per year. Total time approximately 2 years/two conferences plus ongoing continuing education. Jeff Snell has been the worldwide credentialing chairman for the IBBA since 2014.
M&AMI = Merger and Acquisition Master Intermediary. This is the most prestigious lower middle market designation and is provided by the M&A Source [MAS] which is a sister organization to the IBBA. M&AMI no longer requires the broker hold a current CBI, however M&AMI requires additional 300 and 400 level middle market courses and completion of a requisite number of transactions over $1,000,000.00US. Application fee is $250 and annual dues are approximately $500.00. Jeff Snell is on the M&A Source credentialing committee since 2014.
Do you really want a broker who is either too cheap (or can’t afford) or not smart enough to realize that to represent one of your most valuable assets (your business) for sale that they need to invest their own time and money in continuing education training? What if they aren’t even members of the IBBA? – the largest business brokerage association in the world which costs less than $400 per year?
Don’t let a part-timer with no formal training experiment on your deal. This is no place for on the job training!
All ENLIGN Business Brokers have either completed or are in process of earning the IBBA’s CBI credential with one additional working on M&AMI and two brokers having received the designation being current with all requirements.
The firm was founded in August of 2003 by Jeff Snell. One might assume that time in business doesn’t matter. However, being known in the marketplace as the ‘go-to firm’ when it comes time to buy or sell a business is important when attempting to sell your business at the highest market value in the shortest amount of time. Having a large network of buyers, lenders, underwriters, transaction attorneys, transaction accountants and business valuation experts as well as buy-side brokers is a real asset.
As of this writing ENLIGN has over 2800 subscribers to the monthly eNewsletter that features new listings and industry information.
Sometimes it’s not what you know, but who you know and knowing who to contact for specific transaction requirements makes a huge difference not only in time required to complete a transaction, but the overall total transaction value as well.
Visit the NETWORK tab above for a list of our most valued connections.
This is a great question and the reason isn’t immediately apparent.
The answer is two-fold. First, ENLIGN is the only firm in the region that charges a retainer from business sellers. We believe this creates a self-selection scenario where sellers that don’t believe their business will sell never list with us because they don’t want to spend “good money after bad” – and that’s fine with us! (we credit the retainer back at closing so it doesn’t cost any more to work with ENLIGN than anyone else). So, for that reason we start with fewer (but, higher quality) listings.
The second reason is BECAUSE WE SELL THE LISTINGS WE HAVE! We don’t accept every listing (even if the owner is willing to pay the retainer). We have refunded retainers in cases where the owner’s representations turned out to be “less than reliable” or Sellers became unrealistic about the process or the value of their business.
We only engage with businesses and business owners that we feel have a high probability of receiving offers and qualifying for financing.
In short, it’s because we start with fewer higher quality listings and are able sell them – in most cases in less time than the industry average. Occasionally, businesses receive offers before being widely marketed from being listed on our COMING SOON page.
But, we don’t sell every listing. Some industries are more difficult than others and the smaller the business is – the harder it is to sell for a variety of reasons. Sell through percentages discussed at national and international conferences would imply our close ratio is among the highest in the industry and double that of some.