When I first meet them, many of my clients assume that business brokerage and real estate brokerage are essentially the same professions and that these professionals are completely interchangeable. This is actually one of the most common misconceptions in my business. So, let’s cut to the chase. What do these professions have in common? First, they both work on commission. Second…. There is no second. Really. That’s it. It is similar to comparing an electrician to a plumber. They both come to your house and work on things, and they both charge you for it, but they have almost nothing else in common. Each of them has a very specific and different skill set.
Let’s examine this in more detail.
Exposure. When a real estate agent sells your house, he wants the most public exposure possible, if not more exposure. In other words, he wants the whole world to know that your amazing house is on sale. A business broker has an almost diametrically opposite goal. A business broker’s task is much more delicate. He needs to find a buyer for your business in a highly confidential environment, practically conducting his initial search and trying to get potential buyers interested without telling them which business is actually for sale. In a business broker’s ideal world, the only person who would ever know that your business is for sale is the person who actually buys it.
Valuation. Selling a house is almost entirely visual. When you sell your house, a potential buyer can see what he would be buying, and showing your house to potential buyers is the main selling technique that real estate brokers and their agents use. Any real valuation exercise involves retaining an appraiser, whose expertise also is generally limited to houses. Selling a business, however, is almost entirely technical. Seeing a business location is only a small part of a buyer’s evaluation. A business broker needs to be able to value a business, and this, in turn, requires a certain experience and skill set. In order to value a company, a business broker needs, at a minimum, to estimate the cash flow to a potential owner and to adjust it for any one-off expenses, any personal expenses, any expenses not on market terms and any benefits the seller has already drawn. Other factors, such as revenue, the owner’s role, complexity, lease terms, franchise issues, location and industry, among others, need to be accounted for when valuing a business for sale.
Additionally, a competent business broker needs to create a comprehensive offering memorandum which analyzes the main aspects of the business for sale. A proper offering memorandum typically includes a general description of the business, a financial analysis, key performance indicators, an operational analysis, an overview of employees and other items. An offering memorandum is not required to sell our house, and a real estate broker and its agents generally draft only a short listing summary for posting on websites. The level of detail and analysis required to list a business is truly differentiating.
Because these two professions are so often confused, a lot of business owners expect similar commission rates between the two. It is customary for a real estate broker to charge 5-6% commission, but a business broker’s average market rate is about 10-12%. The spread is driven primarily by the differences in approach, the time required to sell a house versus to sell a business, the level of the involvement required to sell a business versus to sell a house and the depth of analysis required. Some business owners will contemplate saving on commission by hiring a real estate broker to try to sell their businesses. This is sort of like hiring a plumber to fix your wiring issues – it might work, or it might burn your house down. While it is tempting to save on commission, by hiring a real estate broker to sell your business, you risk never selling your business, or saving on commission expense by sacrificing value. Remember, for every $100,000 of sales price you lose by using a real estate broker instead of a business broker, you save about $5,000 in commission, but lose almost $90,000 in value. And if you never sell your business, the difference in commissions is $0, because you received no money.
An experienced, competent business broker, like Comer Business Brokers, will be able to draft a compelling offering memorandum, make sure that confidentiality is maintained, assist you and a potential buyer each step of the way – helping with licenses, leases, franchise reassignment, etc., facilitate communications between accountants, lawyers and other advisors, and, perhaps most importantly, act as a buffer between you and prospective buyers so that you can focus on running your business until we can sell it. We can also help guide you through what is often a very emotional time.
Comer Business Brokers is a full-service business brokerage firm located in Fairfield County and serving the entire state of Connecticut and Westchester county, NY. Owner and founder Irina Comer has more than a decade of experience with mergers and acquisitions of all types. She spent ten years at PricewaterhouseCoopers advising local, national and international companies on transactional issues, including valuation, diligence, structuring and positioning. After obtaining her MBA from New York University’s Stern School of Business, Irina worked in the Mergers and Acquisitions division of Bank of America Merrill Lynch. Comer Business Brokers can help you to structure a deal that makes sense and close efficiently and with confidence, all while maintaining the strictest confidentiality of your personal and commercial information. We hope that this adds to your understanding of the process, and we look forward to hearing from you when you decide to take the plunge. Best of luck!