What is the role of a business broker?
A business broker is a person or company that acts as an intermediary between sellers and buyers of private businesses. Their role is to estimate the value of the business; advertise it for sale; handle the initial interviews, discussions, and negotiations with prospective buyers; facilitate the progress of the due diligence investigation and assist with the sale.
In many instances a buyer can approach a seller and conclude a transaction without the assistance of a broker; however the process of buying an existing business can be fraught with hidden difficulties, negotiation challenges and time delays, so there is a clear advantage to using the professional services of a business broker to handle these issues on your behalf.
What makes a good business broker?
Not all business brokers are created equal and, not withstanding that brokers must be registered with the Estate Agency Affairs Board, there is no watchdog organisation to regulate the industry so it’s important to do your homework. What differentiates a good broker from a bad one?
According to Derek Fox, director of Succeed Business Brokers: “A good broker won’t try to sell you their existing stock – they will try to find you the business that is right for you.”
Businesses are big-ticket items. When it comes to choosing the right business broker, do some basic enquiries on the broker and find out if they are a member of any association or industry body. You could also ask the broker to provide references.
Make sure you are able to answer all these questions when choosing someone to represent your interests:
- How long have they been in the industry?
- How many deals have they done?
- What did their last deal entail?
- What was their biggest deal?
- Does your broker come across as a professional?
- Are they well presented?
- Do they keep appointments?
- Do they return calls promptly?
- Do they know what they are talking about?
- Do their documents, letters, forms, policies, procedures, contracts, disclaimers seem professional?
- What type of confidentiality agreement do they send out to prospective buyers?
- What type of ads/locations do they use to advertise the businesses they are selling?
The buyer should also find out if the broker is going to help them from start to finish, and not just disappear once he has put them together with the seller. Otherwise the process can drag on for months while the buyer applies for financing.
What value can a broker add?
As Derek Fox, director of Succeed Business Brokers, says: “Most people who are in the market to buy a business have never owned or run one before. Also, very few sellers price their businesses properly.
A business broker has a handle on the local marketplace and access to market data and pricing not available to the seller. Business brokers are also good sources of outside financing. In some cases the full sale price is not the issue; rather how the sale is structured is key to a successful sale.”
What is the standard commission fee paid to business brokers
The business brokering industry is not regulated in South Africa, so there no prescribed commission fee. According to Jim Renwick founder of Renwick Business Brokers, the industry-norm is a fee of 10% plus VAT.
Who pays the broker commission?
Sellers usually pay brokers a fixed fee or a percentage of the sale price.
What type of information will financier want from the buyer in the purchase of an existing business?
A financial institution will typically require the following documents from the buyer who is applying for finance on a going concern:
- Memorandum of Agreement (drafted by a competent broker or attorney who protects both buyer and seller)
- Inventory of assets
- Last two years’ financial statements (signed by accountant & seller)
- Last two years’ VAT returns
- Last 12 months’ management accounts and applicable VAT returns
- Last six months’ bank statements
- Copy of the present lease agreement
- Founding statement if a close corporation
- Franchise manual if applicable
- Copies of all licences necessary to run the business
- Comprehensive business plan
- 2-month cash-flow projection
- Detailed purchaser’s CV
- Identity document and marriage certificate
- Last three months’ purchaser’s personal bank statements
- Proof of deposit and how obtained
- Purchaser’s career certificates and diplomas
- Purchaser’s insurance policies with surrender values
- Pictures of business
- Personal statement of assets and liabilities
- Bank loan application document