While they are more often hired by the seller of a company, a broker can also be hired by a prospective buyer to do a highly targeted search for businesses that meet your acquisition criteria. Here’s how to work with a broker.
Canvass your network
Your first step should be to canvass your network of contacts (e.g. industry contacts, accountants, lawyers, advisory board members, trade groups) to find the names of experienced and reputable business brokers who work with buyers. (Some only work with vendors.)
Check broker websites
Look at the websites of prospective brokers to review their expertise. It’s a good sign if the broker has a designation as a Certified Business Intermediary, but many skilled and experienced brokers don’t have this certification.
You can also find a listing of businesses for sale on many brokers’ websites. These are companies whose owners have hired the broker to find a buyer for the business. If you find a company that interests you, you can contact the broker to get more information. If a deal is concluded, the seller pays the broker’s fee, which is typically a percentage of the selling price.
Conduct a passive search
You can also contact brokers to ask to be included in what’s called a passive search. This is a list of prospective buyers that many brokers maintain to connect them with sellers. There’s no fee to be included on such a list, and the vendor pays the broker’s fee if you end up making an acquisition. In the absence of a selective engagement, it can be a good idea to register with several brokers to be included on their lists of buyers. You should be on the look-out for a reputable broker to increase your opportunity of finding the right business for you.
To be included in a passive search, you will typically be asked to tell the broker about yourself and give him detailed criteria about the type of business you’re looking for—e.g. the industry and geographical area, your budget, minimum gross sales and cash flow, expected vendor financing, your past business experience, etc. You may also need to sign a confidentiality agreement and submit a financial capacity statement that shows you have the means to buy a business.
Carry out an active search
You may choose to hire a broker to do an active search. Again, you’ll typically have to list your criteria for the acquisition, provide a financial capacity statement and sign a confidentiality agreement.
The broker will then sift through companies in business databases to find those best suited to you. These databases mostly consist of existing companies that aren’t listed for sale, so the broker will contact them to see if the owners would consider selling. It’s surprising how many people say, ‘Yes, it’s always for sale for the right price.
If the buyer is interested, the broker can arrange to get more detailed information and a valuation. The valuation is usually done at the buyer’s expense unless the vendor wants to see the results, in which case both parties may split the cost.
If a deal goes through, the buyer pays the broker’s fee. Also, the buyer usually pays the broker a retainer upfront and a monthly fee for their search time.