Getting a good offer for your business is the culmination of all you have worked for.
When it comes time to sell your business you will be faced with the decision to sell it yourself or retain a broker. Most business owners see this as an either-or choice, but it doesn’t have to be. You can also use a hybrid approach. In this article we will provide a framework for answering the question: “Should I sell my own business, retain a broker, or use a combination of the two?”
Let’s look at some of the key attributes you should assess to help make this decision.
Size of Your Business
The smaller your business the more you should lean towards selling it yourself, depending on your assessment of the other attributes below. Many small businesses are successfully sold directly by their owners. There is no magic cut-off number, but businesses priced under $2MM or with few employees, are easier to sell than those priced above $2MM with many employees.
There are well-established marketplaces for small business sales. In fact, the average sale price of a small business is about $250,000. Potential buyers for businesses in this price range are not hard to find or engage with by listing your business in these marketplaces, such as BizBuySell and BizQuest. The value a broker adds in this price range is less comprehensive and only incremental when the business owner possesses the attributes discussed below.
Businesses selling for more than $2MM typically attract a different type of buyer than those selling for less than $2MM. Buyers for businesses in this price range can be more difficult to find and qualify. Buyers in the market for larger businesses also run a much more sophisticated process for assessing a business’s value and future potential. Their due diligence process is also much more intense than that used by buyers of smaller businesses.
This is where good brokers earn their success fee. A good broker can help an owner get significantly more for a larger business than if the owner tries to sell the business on his own. The value a broker adds in this price range is more comprehensive and can provide an exponential return to the owner.
Scope of Your Business
If you run a lifestyle business, or one that serves only a local or regional market, the more you should lean towards selling it yourself. Selling a lifestyle business requires the current owner to be very involved in the discussions with potential buyers. The buyer, after all, wants YOUR lifestyle.
This type of business typically covers a fair amount of the owner’s expenses – called discretionary earnings. A broker can help prepare and present the “true” numbers, but can’t answer the question, “What’s it like to run this business day-to-day?” Only you can adequately convey the mental, emotional, and financial rewards of running your business.
It’s also likely the buyer will need a lot of cooperation from the seller during the transition and post-sale, for a small, lifestyle business. A larger business usually has systems and documented procedures that don’t require as much cooperation from the owner during the transition. When lots of cooperation is needed between the buyer and seller to transition the business, Brokers add only incremental value.
If you run a scalable growth business, typically serving a national or international market, a broker can add a lot more value in the selling process. A broker can cast a wider net than you can. A broker knows where to “fish” for national and international buyers. A good broker also has a “mandate list” from buyers looking to buy a business like yours. A broker can also bring in integration specialists if the transaction is a merger as opposed to a simple sale of assets.
Your Time and Availability
If you can devote the time necessary to package, market and sell your business, the more you should lean towards selling it yourself. The process takes work. It can be very time-consuming. If you are organized and good at time management, there is no reason you can’t sell your own business. If you have a good team (whether partners, employees, or professional advisors) and can delegate many of the tasks involved in selling, it makes more sense to sell by owner.
On the other hand, if running your business is very demanding and you already think there is not enough time in the day, then you should probably retain a broker. Likewise, if managing the selling process would take you away from your business in a way that it may suffer, or may even lose value, then by all means it pays to retain a broker.
Your Skill Set and Emotions
If you are good with numbers, good with people, and have a knack for marketing and pitching the value of your business, the more you should lean towards selling it yourself. If you enjoy sales, including cold calling, then you will likely be successful at selling your own business. If you are a good negotiator you can sell your own business. If you can keep your emotions in check when potential buyers are telling you all the things that are wrong with your business and why the price should be lower than what you are asking, your chances of getting to an acceptable transaction on your own are high.
If you are not good at running a methodical process, not good at sales, and/or have little patience for tire kickers and endless questions by people you don’t know, you should probably retain a broker. A good broker has a combination of financial acumen, business operations acumen, and people skills. A good broker can also see both sides of the deal and be impartial, because he or she is not emotionally invested in the business the way you are.
Your Connections with Potential Buyers and the Nature of those Buyers
If you already have a good idea about who will be interested in buying your business, the more you should lean towards selling it yourself. If a company has already approached you about selling within the last year, you should probably sell it yourself. If the likely buyer is a family member, friend or local resident looking to run a small business, it makes more sense to sell your own business than retain a broker. In these cases, a professional advisor or non-commissioned broker can help guide the transaction.
In the case where the potential buyer is one of your competitors, it probably makes more sense to retain a broker. If the buyer is a private equity group or investor, then it probably makes more sense to retain a broker. In these cases, a broker can bring multiple bidders to the table and fetch you a higher price than trying to sell it yourself.
In any case where you already have connections to potential buyers, or have already been approached, a good broker can still add a lot of value. Most brokers will “carve out” a list of potential buyers that you brought to the table. They take a reduced fee if any company on the carve out list ends up buying your business. While discussions with those prospects are underway, the broker can be casting a wider net as a backup, and also to use as leverage to get you a better price in the event one of those prospects decides to extend an offer.
Once you accept an offer and take your business off the market during the due diligence process, a broker can keep other prospects “warm” in the event the deal falls through (and they often do during the due diligence period). Most offers (Letters of Intent) require the owner not to engage with other interested buyers during due diligence and leading up to the closing. Nothing prevents your broker, however, from staying in touch with other buyers.
Your Need for Confidentiality
If you don’t need to keep the sale of your business confidential, the more you should lean towards selling it yourself. You can openly promote it. You are free to talk with anyone and everyone about it. You can tap into your network to help get the word out. You have decided to sell and are open to offers.
If you need to keep the sale confidential, then you should probably retain a broker. Many businesses can be damaged if their customers, employees, or suppliers find out the business is for sale. Brokers are skilled at “blindly” listing the business and reaching out to potential buyers without revealing the name or location of the business. They only engage with buyers after they have been qualified and signed a Non-Disclosure Confidentiality Agreement.
How Much Money You NEED to Make from the Sale and How Quickly You Need to Sell
If you need to sell quickly and/or need to eke out every dime and walk away with a specific sum from the sale of your business, the more you should lean towards selling it yourself. Brokers typically take about 10% of a business they sell under $1MM. They use a sliding scale (the Double Lehman Formula) for businesses priced over $1MM.
Most brokers also have a minimum fee, so if you end up selling for much less (because you have no choice), the broker fee could be a much higher percentage. In some distressed sales, a broker could end up with 30% or more of the price.
If you need to sell quickly, or need a minimum amount to satisfy creditors, selling the business yourself is your best bet. Most brokers won’t take a listing unless they have at least six months to sell the business. It’s too much work for them to take a listing that expires in less than six months. The odds of a sale in that timeframe are not good. The average time to sell a business is ten months. A broker is not going to have the same sense of urgency as you do when time is of the essence.
Selling Your Business Using a Hybrid Approach
As you read through the attributes above to decide whether selling your own business or retaining a broker would be best, you likely discovered that you were strong on some and weak on others. No clear choice. For example, you have the skills and connections with potential buyers (good indications you should sell by owner), but need complete confidentiality and have limited time to devote to the sale (good indications you should retain a broker). This is where the Hybrid approach could work best. It’s the best of both worlds when your situation is mixed.
These are some of the advantages of selling yourself but using a broker on a limited basis in a hybrid approach:
- No commission; you keep all the money from the sale.
- You run the process and do most of the prep work; the broker sets up the process, reviews the work, and provides guidance on a limited basis.
- The broker can list the business confidentially without revealing the name or location; all inquiries go to the broker so prospective buyers can’t learn the business or owner by email address or phone number.
- The broker does initial screening and gets qualified buyers under NDA; you take it from there.
- The broker can provide all the necessary forms, agreements, and templates you will need to list, market, and get offers. The broker also refers professionals you may need during due diligence and closing.
- The broker can be your professional sounding board for offers and negotiation and can step in to provide fixed fee à la carte services if you need them.
For a more detailed breakdown on what you as the owner does and what the broker does in a non-commissioned hybrid approach, see this handout.
In summary, deciding whether to sell your own business or retain a broker does not have to be an either-or decision. If you can sell your business yourself, you should! If your business proposition has the attributes that lend themselves to a sale by broker, then find a good one! Don’t overlook the opportunity of getting the best of both worlds by using a hybrid selling approach. SellBiz is one of the few brokers that offers this cost-effective approach.
Reach out to us if you would like to discuss the tradeoffs.