Definition - What does Business Broker mean?
A business broker is a person that assists in the sale of a privately held small business. Business brokers will usually deal with companies with an enterprise value of up to $3 million. Companies with higher enterprise values will usually seek the assistance of a mid-market boutique investment bank.
Services commonly provided by business brokers include:
- Assist the client in establishing a probable selling price for the business;
- Prepare a marketing document or information memorandum on the company;
- Conduct buyer searches; and
- Coordinate negotiations and provide overall deal management.
Divestopedia explains Business Broker
Fees for business brokers are usually commission based on enterprise value and can range from 5% - 12%.
When hiring a business broker, company owners need to be cautious of the following situations:
- Business brokers that come from an outside region promising foreign buyers that will pay multiples much higher than what is currently offered in the market. This is often a tactic to sign sellers up for an exclusive engagement, and collect significant upfront fixed fees for the preparation of an information memorandum or a "book". After collecting this large fee, the broker will not do much to deliver legitimate buyers to the table.
- Brokers that have a fee tail longer than one year after termination. We have seen instances where a broker will sign up a client and introduce the opportunity to hundreds of potential buyers with very little alignment and/or low probability of success. If the business is not sold under their engagement, the owner is still obligated to pay that business broker a fee if a deal is closed with another buyer during the fee tail period. In this case, the broker does not bring any value but still gets a fees for minimal effort.