Questions to Ask Broker
Is the broker a full-time professional?
When selecting a business broker it is important to find one you like and trust. Ask about their education and experience. Ask the broker for references and call those references. Ask the broker about their professional affiliations and designations. Visit the office and see if it is what you expect – a professional environment backed with all of the necessary marketing and sales resources. Ask to see the office manual of policies, procedures and forms. Ask to talk to the brokerage owner and learn if he/she spends 100% of their time managing and supporting the brokers.
How do they value your business?
There is no simple method. But to approximate the value of your business, you should consider both its assets and earning power. The earning power of a business is defined as the annual pretax earnings plus owner’s salary and perks added back, which determines the real earning power or the Seller’s Discretionary Earnings (SDE). In some evaluation methodologies (Excess Earnings Method) this SDE has a manager salary, economic depreciation, return on working capital and return on operating assets deducted, then the balance is divided by the appropriate capitalization rate (usually in the 15 to 30 percent range) before adding back working capital to determine the value of a business. Other valuation methodologies (Multiple of Discretionary Earnings Method) multiply the SDE by a risk number (multiplier) to determine value. Our brokers typically use both types of methodologies to value a business. Also, market-based data (comps) can be used in conjunction with an SDE methodology so that they can serve as a “reality check.” Most buyers and lenders place extensive weight on the company’s ability to generate earnings. Therefore, it makes sense to use earnings methodologies to determine the value of a business and then use market-based data to check the reality of the value. As with most things in life, demand and asset value will also influence the business value. Desirable businesses and businesses with a large asset value command a premium. In the final analysis, however, the price tag on the business is your decision.
Does the broker have an active database of buyers?
Successful business brokers enjoy a large “queue” of buyers. A large brokerage with many brokers has thousands of buyers in “queue.” Find out if your broker has buyers looking to purchase a business like yours. In our brokerage, approximately 50% of our buyers come from the “queue” of buyers in the various broker’s databases. You’ll have a better chance of selling if the broker already has buyers looking to buy.
Does the broker have a large number of businesses for sale?
A large number of businesses for sale attracts a large number of buyers. Ask how many businesses your broker’s office has for sale. One of the best tools to promote the sale of a business is similar businesses for sale. A good business broker should be able to expose your business to a large pool of potential buyers. Having a large quantity of businesses for sale attracts a large pool of buyers.
How accessible is the broker once you agree to let him/her sell your business?
The lines of communication should always be open. The business broker is representing you and acting on your behalf and should be available for consultation as required. It’s reasonable to expect that your broker will return messages or emails promptly and that you will be given regular updates. It is good to inquire about a broker’s responsivness when talking to references.
How many buyer prospects will you typically talk to in selling a business?
A good broker keeps detailed records of every active prospective buyer that has passed through their screening process. Ask to see some samples of the broker’s buyer database files. These files will show how many buyers visited other businesses your broker has for sale. These records should include the prospect’s financial status and the kind of business each is looking to buy in terms of type, size, geographic area, etc. A successful broker will have prospects ready as soon as you list your company.
Does your broker have a highly effective website?
In today’s global marketplace, prospective buyers are no longer limited to a small geographical area. A buyer for your business could come from anywhere in the world, if your broker has an effective website and it is easy to find. The Internet is a powerful marketing tool. Check out your broker’s website. Is it easy to find? Is it easy to use? Does it project an efficient, professional image?
Is your broker licensed?
Some states, like California, require business brokers to have real estate licenses. Why? A real estate license forces the broker to understand the laws of agency and understand his/her fiduciary duty to you. Also, real estate is often included with the sale of a business.