Three Questions to Ask A Business Broker

Interview Business Broker Before Hiring

When it comes time to sell their business, every business owner should first sit down and interview their prospective business broker. The broker should have a chance to demonstrate their experience and competency during the interview process by analyzing and evaluating the business. Although the seller should not pay any up front fees to the broker, the business seller is potentially trusting their broker to sell their most valuable financial asset. The seller should ask the business broker three important questions during the interview process:

  • “What similar businesses as mine have you previously sold?”
  • “How will you justify my business valuation to buyers?”
  • “How will you keep the sale confidential?”

Experience Selling Similar Businesses

The first question of what similar businesses the business broker has previously sold is absolutely crucial. In business sales, experience matters. A professional business broker must have the requisite experience in place to properly anticipate issues that need to be proactively addressed during the selling process so a deal stays on track. In order to attract the right buyers for businesses within certain industries, the business broker must also have the experience of having previously dealt with buyers of similar businesses.

Example of Business Broker with Experience Selling Similar Businesses

Justify Business Valuation

The second crucial question for a business owner to ask a business broker in regards to selling their business is how the broker would justify its valuation to a buyer. Justifying a business valuation involves two key steps. The first step is to properly define the adjusted owner benefit of the business. The second step is to justify the multiple assigned to the owner benefit which results in the valuation. Business buyers expect the broker to clearly articulate how and why the valuation (or asking price) was derived. If the broker can not justify and explain the business valuation, then the buyer will probably not end up purchasing the business.

Define Adjusted Owner Benefit of the Business

Adjusted owner benefit refers to the true economic profits derived by the owner of a business. Using the seller’s financial statement (such as a tax return or profit and loss report), the broker starts with the EBITDA (Earnings Before Interest, Depreciation, Taxes, and Amortization), and then adds back a number of different items in order to derive the adjusted owner benefit. This includes any personal expenses of the owner that flowed through the financial statement, unrecorded cash (if proven), the owner’s salary, and any other adjustments to reflect the true economic profits derived by the owner of the business.

Assign Multiple to the Adjusted Owner Benefit

  • The second step involved in justifying the valuation of a business is explaining how the broker derived the multiple of adjusted owner benefit used in calculating the valuation.
  • Most business valuations are derived from a multiple of between 2-4 x the adjusted owner benefit.
  • Valuing businesses is an art rather than a science, and many factors affect the multiple.
  • In general, the physical assets, growth rate, lease, location, degree of owner involvement, and competitive advantages of a business all to varying degrees (depending on the industry) affect the multiple or valuation range.
  • The broker must be able to stress which valuation factors are most important for the particular business they are selling, and how exactly those factors determine the multiple of adjusted owner benefit used for the valuation.
  • If the business broker can not do this during the interview process with the business owner, then the business broker will probably not be able to do so with potential buyers.

Keeping the Sale Confidential

Confidentiality is extremely important to most business owners wanting to sell their business. During the interview process with a business broker, every seller should ask how the broker will keep the sale confidential. The business broker must explain how every potential buyer must complete and sign a Non-Disclosure Agreement (NDA) before any confidential information (including the name or specific location) is revealed. An NDA protects the seller’s confidentiality insofar as preventing a buyer from telling anyone else about the sale, and prevents a buyer from contacting the seller’s employees, customers, or suppliers without prior consent.

‘Blind Ads’ Protect Confidentiality

In addition to having every potential buyer sign an NDA prior to revealing confidential listing information, a business broker must also maintain the confidentiality of the sale by placing ‘blind ads.’ A ‘blind ad’ is the means by which a professional business broker advertises a business online for sale. A ‘blind ad’ needs enough information to attract the interest of potential buyers while being careful not to disclose its identity. The name of the business, specific city or location, address, and pictures are all withheld. In the interview process, the business broker should explain how they would construct a ‘blind ad’ to protect the seller’s confidentiality.

The best means of finding the right business broker to sell a business is by having an in-depth interview and business evaluation. The business broker should clearly and convincingly answer the crucial questions of what similar businesses they have sold previously, how they justify the business valuation, and how they would keep the sale confidential.

Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.