Selling your business - do you need to use a broker?

If you are looking to sell your business, then finding and selecting a suitable buyer will be your primary concern. If you do not already have a buyer lined up and need to go to market, then appointing a business sales broker may be a necessary step forward.

Not all deals will need to involve a business sales broker, but if you wish to appoint one then you need to choose carefully and ensure that you are comfortable with the commercial arrangements with the broker or consultant. You will be placing the destiny of your most valuable asset in their hands, and there are important aspects that you will need to consider as part of the appointment which we can guide you through.

In this blog we discuss the role that brokers can play in your business sale, what to look out for, and some of the pros and cons involved.

When a broker is not required

If you already have someone interested in acquiring your business, whether that be via a management buy-out, other means of internal succession, or you have received an external approach directly, then it is likely that you will not need to appoint a broker. You will be able to go straight to your lawyer to get the ball rolling on your sale.

Your lawyer will be able to guide you through the process, ensuring your interests are protected and giving you the best chance of a successful completion on your sale.

When appointing a business broker or agent

In any event, before instructing a business broker or agent, you should meet with your lawyer to discuss your overall objectives and whether any legal issues need to be addressed before putting your business on the market.  This process is known as ‘grooming’, and involves getting all your key information and documentation in good shape, for example:

• standard terms and conditions of business;
• supplier contracts;
• bespoke third party agreements;
• intellectual property rights (such as trade mark and patent registrations);
• employee contracts and documentation, such as policies or pension arrangements; and
• debt documentation such as loan agreements and debentures.

Dealing with these issues before engaging a broker will be advantageous, as it will put you in a strong negotiating position and will prevent delays due to problems emerging at a late stage.

As soon as you have a shortlist of brokers, it is important to ask your solicitor to review the proposed terms and conditions of appointment, as well as the pros and cons of different arrangements.

It is important to note that there are different types of service providers to consider when you look to sell your business:

Traditional business sales brokers

A traditional business sales broker works in much the same way as an estate agent, except they sell businesses and not properties. They will typically market your business for sale, liaise with interested parties and help agree terms.

They may or may not be involved in the valuation of the business – this will depend on the circumstances and the agreed scope of services.

They typically make their money from commission on the sale, so are motivated to get the best possible deal for you.

Business sales consultants

There are other business sales consultants which, in practice, are less concerned with finding a buyer. Some are more concerned with helping ‘shape’ the business so that it is more marketable and saleable, and others provide only a business advisory or valuation service.

These businesses are less likely to work for a commission, and will usually charge for their services on a time or project basis.

It is important to review their terms and conditions to ensure that the arrangement will deliver the objectives which you need.

Agreeing the scope

Whichever sales service you require, it is critical that you agree the scope of the instruction from the start, so that you both know where you stand and there are no misunderstandings as the matter progresses.

The benefits of appointing a broker to sell your business

There may be many benefits in appointing a sales broker. Some of these may include:

• Industry knowledge – this can be particularly important in certain industries, especially those that are very technical or highly regulated, or where there may be other barriers to entry, meaning that the pool of potential buyers is reduced, and the nature of any incoming queries may be complex.
• Industry contacts – linked to industry knowledge is the value and relevance of the broker’s contacts, as many external buyers choose an acquisition target business from within an industry in which they are already familiar. As such, the broker’s list of key industry contacts can be worth its weight in gold.
• Valuation advice – in some cases brokers will be well-placed to advise on your business valuation. However, in other cases, professionals such as your accountant or a business valuation specialist may be better placed. Where your broker is able to provide a sound and reliable valuation, this can be very useful in helping inform your asking price and in negotiating a deal.
• Sales progressing – in much the same way as an estate agent, a broker can be an important link in the chain from the sales progression point of view. They can contact all the key figures in the process without regulatory constraints, including the buyer, the seller and both sets of solicitors, to help drive the sale forward.
• Sounding board or ‘middleman’ – a business sales broker can assist with day-to-day queries, in tandem with your solicitor, and can be a good ‘go-between’ so that frank or difficult conversations can be held with the buyer without your direct involvement.

Potential downsides of appointing a broker

Some of the downsides to consider and address include:

• Confidentiality and trust concerns – brokers may not have the same strict confidentiality obligations as your solicitor, and this can be a cause of concern, particularly if your business trades in a small or niche industry where everyone knows one another. You may not want your competitors knowing your desire to sell and the details of your business operations. As such, it is essential that your broker contract covers these matters in detail.
• One step removed from buyer – you will be one step removed from the sales process, which can lead to miscommunication at times.
• Use of your time – there is little doubt that instructing a broker to act on your behalf involves a degree of time commitment, and it may also cause certain unavoidable delays. Management time will be needed during the entire process from instructing your broker, briefing, and liaising with them throughout, checking the facts on their particulars and listings etc, and authorising them to proceed with the deal.
• Lack of in-depth knowledge of your business – unlike your lawyer, your broker is unlikely to be very au fait with your business and the legal documentation that is integral to it. This may cause delays at the outset and as the matter progresses.

How we can help

If you proceed to appoint a broker, our company commercial team will advise on the terms of this arrangement so that you can extract the most value from the relationship while protecting your interests and minimising the risks.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.