UPDATED: September 08, 2019
What ideally should happen at your first business broker meeting?
You have been far too busy working in your business to sell your business. Thus you have decided to hire a specialist to help you exit.
However, a business broker needs a certain level of contribution from you so that your business broker meeting is productive. If the meeting starts off on the wrong foot where misconceptions or unrealistic expectations arises, then this may become a self-fulfilling prophecy where you justify the doubts you had initially about using a broker if the business remains unsold on the market.
A situation best avoided to help you save time, money and lost opportunities.
Mindset is important. So let's tee off with this discussion.
Before you meet the business broker, you should have expectations of what the business broker can do for you.
Is there a meeting of the minds between the business owner and the business broker? If you and your broker are not on the same page in the way of expectations and mindset, then the journey to get your business sold may be met with frustration and unnecessary problems.
Firstly, many run-of-the-mill business brokers are very vague about how they will sell your business other than using 'advertising' and using their database. But you may have expectations that the broker may feel it is unrealistic. So you must have this discussion upfront.
Also, most business brokers are not management consultants. They usually do not offer services to help you to improve your business performance. On the ads, they may make your business look good superficially but deep rooted problems within the business usually are beyond the scope of the typically business broker. This is in the realm of management consulting.
At your first business broker meeting, a business broker should at least be able to identify the problems within a business that scare potential buyers away. At the very least you are aware of the problems and can take action to rectify these problems. For this exercise, I'd typically assess the business against the top 10 criteria that shun buyers and advise suggestions in a report.
Another expectation to be clarified is that business brokers cannot force the market to buy a business that is priced incorrectly. While your business broker may present the business in the best possible light, they cannot force or act unethically to deceive the buyer into a transaction.
Hence, when my clients consult with me, one of my ground rules is for both parties to be honest. I expect my clients to be honest and so will I. Some sellers lie through their teeth to paint a rosy and profitable picture of their business, only to frustrate the buyers, broker and ultimately the sellers themselves later on.
If you are not honest about the state of your business, then your business broker can't identify the problems and help you to fix them. Buyers are far less forgiving - if they sense a problem with the business, they won't buy.
A good business broker is not afraid to point out the problems to a sale because they don't get paid unless the business is sold. They want you to resolve the problems in your business so that buyers are attracted.
The first business broker meeting is an opportunity for the business broker to know your business intimately for the purpose of a successful sale. The business broker may conduct a visual inspection as well, if necessary.
The first business broker meeting may take one to two hours. During this meeting, you should have sufficient employees to free yourself from working in the business. I have seen restaurant owners running back and forth serving customers and trying to find time for the meeting. If the broker can't extract the proper information at the first business broker meeting, you are only doing a disservice to yourself.
At the meeting, you should be the business owner or one of the directors of the company associated with the business. This usually means you are on the record at the ACN (Australian Company Number) or ABN (Australian Business Number) register. If you are not, then you should invite the legal business owners to the meeting.
I have seen spouses, cousins, father-in-laws, parents, managers and siblings act on behalf of the business owners when they do not have the authority to sell the business. Business brokers are generally limited in their ability to help if the business owner is not at the meeting. If you wish to fact-find on behalf of the business owners, this should be properly communicated to the business broker so that they can prepare for the meeting properly. This saves time and grief for all parties concerned.
At the business broker meeting, your business broker may go through a check-list and ask you inquisitive questions such as (but not limited to):
Being honest and truthful about the state of your business will help your broker to understand the business properly, which is the prerequisite to a successful sale.
At some stage, your business broker will ask a very important question - how much do you want for your business?
Once your business broker has figured out the EBIDPDA (Earnings Before Interests, Depreciation, Proprietor's Salary, Depreciation and Amortisation), he/she can provide an appraisal on the price that is likely to meet the market. Unfortunately, this price is very likely to fall below your expectations. Historically, the vast majority of business owners over-value their own businesses.
Appraising what a buyer might pay for a business is both an art and science. If you disagree with the broker, then you can test your asking price on the market. If the sale is not urgent, you can certainly do this for 3 months and see how the market will respond.
However, when there is a time constraint, correct pricing to meet the market becomes critically important.
One of the biggest problems to a successful sale is poor verifiables, lack of proper supporting documents, or no paperwork at all.
This is typically of smaller businesses where business owners expect buyers to have 'x-ray vision' into their business, or expect buyers to sit at their premise for 2 weeks to 'check it out for themselves'.
Supporting documents are integral to proper due-diligence for the buyers. There is a direct relationship between the quality of verifiables and the asking price. The lack of proper supporting documents means higher risks for the buyer. Higher risks will be offset by a lower offer price.
It is unrealistic for business owners to exit their businesses at the price they want without providing appropriate documents to support their claims. This is virtually impossible.
As an analogy, the full retail value of a diamond is in the GIA Certification. The Gemological Institute of America (GIA) certifies most of the diamonds sold to consumers with a Diamond Certificate. And hence, the value of a diamond can only be determined because of this GIA certificate. Each diamond is laser inscripted with a code number and can be easily verified via the GIA website.
Due to high quality lab (man-made) diamonds being flooded onto the market, it is more and more difficult to ascertain natural diamond from lab diamonds without the GIA certificate.
In the retail market, the value of the diamond is 'embedded' in the GIA certificate. Retail customers at the mall simply don't have the time or motivation to hire an expert to grade a diamond. If a customer had to do that, they certainly wouldn't want to pay top dollars for this diamond.
This is also true for a business. If a seller does not have supporting documents and buyers have to do the extra work for due diligence, then they are unlikely to offer top dollars because they can simply pay the same amount for a similar business but with better verifiables. Also, a seller without proper paperwork is often perceived by the buyer to be hiding something. While this may not be true, it is still a difficult psychological hurdle to overcome for the buyer.
At the business broker meeting, you should bring along some of these documents:
Many business owners procrastinate on collating these documents, or wait until a buyer appears. They underestimate the time required to get these supporting documents ready.
An accountant can take weeks to prepare your Profit & Loss Statements (P&L) and other financial reports. The franchisor can take days or weeks to get you a copy of the turnover report. Some buyers expect these reports within 1-2 working days or they lose interest.
While your business is unique in some ways, there are substitutes in the market. Unexpected delays can break the momentum of a sale. In short, delays risk losing buyers.
At the business broker meeting, you should at least bring the P&L Statements, BAS reports and a copy of the lease agreement (where applicable).
If the business has only been trading for a short time, it may not be possible to bring all the verifiables to the meeting. Your business broker should be able to advise further on the ways to mitigate this problem.
Even with the proper verifiables and supporting paperwork, it can still take a while to exit the business. Hence one of the most challenging questions for a business broker to answer is 'how long will it take to sell my business?'.
There is no reliable method to predict when a business might be sold. However, if your business is priced correctly, presented properly, have proper supporting documents and you rectified problems that may shun buyers away, then you'd have put yourself ahead of the competition. This means that yours should be one of the first to sell.
The importance of verifiables and supporting documents cannot be understated. This is because the perfect buyer that may pay your asking price could just be around the corner. If you don't have proper paperwork and the buyer loses interest, you may not find another buyer of the same calibre again.
Remember that one in five businesses fail and are never sold. Don't become a statistic.
Once the business broker has completed the business inspection and understood your business, he/she will explain their services.
If you decide to use a business broker to sell your business, you will be required to complete, sign and return an Agency Agreement to engage the services of a business broker. See Agency Agreement