The Questions Business Brokers Hope You Won't Ask
by Jim Deitz


If you've reached a decision to sell your franchise, you may decide that engaging a business broker to find a buyer is your best solution. Because of the widespread sense of disdain for brokers, I've decided to offer some suggestions that will help you evaluate the qualifications of the brokers in your community. After careful research, you may decide that "no help is better than bad help" and undertake to sell your franchise yourself.

In the last 20 years, the Business Brokerage industry has expanded dramatically to provide help to owners of small companies who wish to sell their ventures. Over that period of time, the number of brokerage companies focusing on the small business community has grown rapidly and then declined several times as a handful of national franchisors of business brokerage offices has expanded and then fallen on hard times, losing a substantial percentage of their offices. This arises from the nature of the industry. Like Real Estate Brokerage, Business Brokerage is not for everyone. Unfortunately, most franchisors in this field do not acknowledge this fact until its too late. Finding quality agents who understand financial statements, small business, franchising, and human emotions in stressful situations would be difficult under any circumstances. To compound the challenge, most brokers offer no salary or draw and pay their agents a straight commission- only when a sale is completed. Few agents pocket their first dollar within six months of joining a brokerage office. You can imagine the turnover problems and the difficulty of keeping a staff of trained, experienced agents.

FranchisesForSaleByOwner.com (FFSBO.com for short) was designed to assist those who accept the challenge of completing their own sale and pocketing thousands of dollars that would have gone to a business broker--if he had completed his assignment. If keeping control of your situation is important to you, you should investigate this new approach. (Click Here for Details)

Click Here for a Glossary of Business Brokerage Terms You may also click on each highlighted word in the article. Use your "Back" Button to return to this report.

Since the majority of small business and franchise owners only deal with a business broker once in their lives, their ability to put their experience to good use in a second encounter is limited. Because many owners don't want to discuss their interest in selling with their business associates, they often don't hear of bad experiences until its to late. Unfortunately, too many sellers are so anxious to get started, that they just accept the terms and conditions presented by the broker and only later discover that their frustration has been endured by many other local businessmen.

Here's a compilation of Frequently Asked Questions that most Business Brokers hope you'll never ask.

Q. Why did you stop by/call me? (Many new Business Brokers are given business cards and sent into the field for "door to door canvassing for listings." If you're in retail or food services, you've probably been approached many times.) (If you call them:) Are you the best Business Broker in town?? Can you sell my business?

A. Many times business brokers will indicate that they "have a buyer for your business." The more truthful will say "I have a buyer for a business like yours." In essence, they have buyers for retail operations, service companies, restaurants, etc.

If they say they have a buyer, you should ask what they know about you. Do they have an idea of your sales volume & profitability? Do they know how many locations you have, the number of employees, etc.? Unfortunately, you'll usually discover that they were just out canvassing any business in the area and dropped in to see if you'd sign over 10 to 15% of your equity to them-if they brought you a buyer. This is how most listings arise, but it doesn't mean your chances are as good as if a buyer said, "I'd sure love to buy Smith's Hardware at East Avenue and Main Street."

Q. How many buyers are you currently working with? How many have $50,000 or more for an investment? (Change the dollar amount based on your company's value.)

A. What amount of cash do you need/expect from your sale? Some brokers may be very successful selling small companies with $25,000 to $50,000 down. If your company is valued at $100,000 or more, they may not be the best brokers in town for your needs. Where do you expect to be priced?

Q. How long have you been with XYZ Business Brokers? What did you do before? How many closings have you personally had in the last 30 days? 90 days? One year? In what percentage of these deals were you working with the buyer? The Seller? Can you give me a list of references of satisfied sellers and buyers?

A. The Business Brokerage industry is very volatile. Many times a new agent is told, "Here's some brochures, go get 10 listings and then we'll let you work with buyers." Some offices provide little or no training for new agents since 80% won't be around in 90 days. This is not the broker you want handling your sale.

Q. How old is XYZ Business Brokers? Is the founder still active? If not, how long ago did the current owner buy the business? How many locations of your company are in our city? Do you share listings? Do you co-broker or share listings with other business brokers?

A. A new Business Brokerage office is probably not the best to list with. Offices come and go and you don't want to be in "limbo" while they're crashing. In many cities, established brokers won't co-broker with new offices until they're in business for a full year. If they willingly share their listings, suggest that you'll be the "listing agency" and give them 60% of their normal commission if they produce a buyer.

Q. How many sales did the office complete last year? What were the industries, by percentage? How many listings were signed last year?

A. According to a recent INC Magazine article, their research indicated that only about 17% of the listings taken by Business Brokers nationwide are actually sold. That's an 83% failure rate!! That's why those that do sell must pay 10-12% commissions to support the wasted time & expenses. The issue is that 83% are delayed in completing a transaction and they've had to postpone their goal of changing careers. If you're going to offer to give 10% to 15% of your selling price away, shouldn't you be sure that you'll be in the 17% of companies that actually sell, rather than just sign a listing agreement?

Q. Of your closings, how many were "all cash" transactions? (Meaning that neither the buyer nor bankers provided any financing?) How many involved seller terms?

A. A high percentage of sales are 50% to 70% seller financed. This is the best way to get the best price for most franchises. If you demand "all cash," you'll narrow your buyer's pool and you may undermine the brokers enthusiasm and willingness to work hard for you.

Q. Do you need a Real Estate or other special license to be a business broker in our state?
How long have you had your license?

A. Some offices try to "run under the radar" and allow agents to go out and prospect while studying for their certification. In most states, this is not permitted.

Q. Describe the best buyer prospect you currently have for a business like mine.

A. (Do this before you get into Annual Sales, Profitability, and your Asking Price.) See if the broker has a clue as to the type of buyer who would want your franchise.

Q. What are the buyers you've talked to lately looking for?

A. Listen and probe for pertinent details. Are they willing to work in a 7-day-a-week retail environment? Do they want something home-based? Are they prepared to make sales calls? Do they seek a staff to do all the work or will they consider getting dirty? Are they looking for food & beverage operations? What hours? How much cash do they average? What percentage will pay all cash if I decide to sell? Vary your questions to discover if the market (at least at this broker's office) is right for you to sell now.

Q. How many buyers do you personally have that you think would have an interest in buying my franchise?

A. Then I can expect you to have at least half of them here on a tour within the next 2 weeks?

Q. How often will you advertise my specific business?

A. Demand a specific number of ads per month (at least 1 that mentions your industry, if not your location, price, etc.) While an ad that says, "Sub Shops-3 to choose from" is ok to find buyers for any of the broker's sub shop listings, if you're selling a swimming pool cleaning business an ad stating "Service Businesses-Many sizes & industries" will be of minimal value. Demand that they run an ad mentioning "Pool Service" at least monthly.

Q. What, specifically, will you do to earn your 10/12%?

A. Will they help you arrive at a suitable asking price? Will they develop a printed Marketing Circular? What will it contain? How many pages are typical? Do I have control over what it contains? Will it contain photos, tables, charts, demographics? What qualifications must a buyer have to get a copy of it? Be sure they promise to obtain a Non-Disclosure Agreement from each buyer before revealing details about your company.

Q. Since you're convinced you're the best broker to help me, what promises will you make?

A. Try to get a commitment to advertise the specific franchise at least once a month. Force the agent to promise to call you to bring you up to date on progress at least, once every two weeks. Get a promise that they'll tour your unit 3 or more times a month and that they'll bring a signed Offer to Purchase with a deposit check attached, at least once every 45 days. Most will really start back peddling on these issues, since the "dirty little secret" is that a high percentage of listings are never toured, and, of course, no offers are ever written. If you get some of these promises, make the agent write them in the agreement.

Q. Can I come to a sales meeting to discuss with all the brokers in your office what a great business I have?

A. Many times a broker will believe in his listing, but others will not. Maybe they question the price, terms, profitability, franchising in general, potential ease of training a new owner, or even the industry itself. If all the agents in the office don't help, chances are much slimmer that you'll be in the 17% who can say, "My broker helped me sell my business." You should take industry statistics and enough details about your franchise to get these brokers excited about earning a commission by helping you.

Q. I want the option to sell my franchise to buyers I find, those that my franchisor finds or any referred to us by other contacts who are not Business Brokers without paying you. In essence, you'll be the only broker, but we amateurs can deal directly with buyers. I understand this is an "Exclusive Agency" listing.

A. Keep your options open. If your franchisor sends a buyer, you can negotiate a sale. If you decide to engage FranchisesForSaleByOwner.com to help you complete a transaction, you shouldn't have to pay the broker, too. You should try to negotiate that selling to a buyer provided by your franchisor or FranchisesForSaleByOwner.com should result in a much lower commission, if any.

Q. How long a listing period do you request?

A. Traditionally, brokers ask for 6 months and settle for 90 days. Some are now demanding a one-year listing and many franchise owners I've spoken with are very unhappy that they were tied up so long with no activity. Ask them, "Why so long, if you're so good?" "I'll only sign a six month listing with the right to cancel if you haven't shown any significant activity after 90 days." Be sure they amend their pre-printed agreement to show this. Most agreements will have a caveat that the "Broker promises to use its 'best efforts' in the Broker's ordinary course of business." Demand that the broker explain to you their definition of "best efforts." Get confirmation that advertising, touring and writing offers, and keeping in contact with you about their activities are part of their "best efforts" performance. Let them know that failure to tour, write offers and keep in contact with you will precipitate the termination of the listing after the 90 day time period expires. If they will be getting a Non Disclosure Agreement signed on your behalf, tell them that you want a weekly list of those who have signed such an agreement.

Q. What do you see as the top four or five advantages and disadvantages of a franchise?

A. Many business brokers don't understand franchising. When a buyer suggests that buying an independent company will save them the monthly royalties, how they respond is critical. If he can't defend the concept of paying royalties for the services you receive, he's of little value to you.

Q. How many business owners has your office sued for commissions in the last 24 months?

A. Any business relationship can break down and lead to litigation. But it seems that some brokers today are very paranoid and believe any non-renewal candidate must be planning to sell without paying a commission.

One franchisee of a successful national chain reported that a business broker (also a franchisee of a national system) did little or nothing for the first 11 months of a 1 year listing. Then they called and said they had the ideal buyer but needed another 1 year listing before they'd bring him over. The seller said he didn't plan to renew but would honor the listing if the buyer was introduced to the business before the expiration. A week later he wound up in the hospital and unable to return phone calls. After getting on his feet he received a call from the broker's attorney threatening suit for selling while under contract to the broker. He explained to the attorney that no sale had been negotiated nor completed. A week or two later he was sued, anyway. Thankfully, his attorney taught the broker some humility!!

Addendum:

If you're already listed with a broker and this information seems all too real, call and ask for a meeting with the owner of the business brokerage office. If, like many, its been weeks since you've seen or heard from your broker, explain that you want your listing terminated because the company is not performing under its "best efforts" clause. Many brokers will fight this and threaten litigation. You should demand, at the very least, that they give up their exclusivity and permit you to sell the business without their aid without paying them a commission (but only to buyers they have not introduced to the business). As a last resort, you should tell them that failure to advertise, tour and send you information on who's signed Non Disclosure Agreements in the future will be deemed as justification for terminating the listing agreement.

If the business brokerage office owner sees you as an ongoing "thorn in his side," he may just release you from the agreement to avoid the hassles. Remember, if you had a partner who owned 10% of your company and had made promises to perform certain tasks in exchange for his 10% ownership, how would you respond if he/she didn't show up for work for weeks at a time?


Written by Jim Deitz, President
Andover Franchising, Inc.
1010 Huntcliff, Suite 1350
Atlanta, GA 30350
800 220-8256
770 587-2538

www.FranchisesForSaleByOwner.com

www.TheFranchiseDoctor.com

Glossary of Business Brokerage Terms

Listing This is the contract between a business owner and the brokerage concern that is engaged to sell it. Critical points covered include the commission percentage; any minimum fee due; the term (or duration) of the listing; any demands of exclusivity; how long the broker claims protection after the listing expires; and what promises the broker makes.

Commission The majority of business brokerage listing agreements require no front fees or payments but instead collect only on successful performance. According to recent reports, most small business brokerage offices sell only one in six of the businesses listed. Commission rates vary from 10% to 15% of the selling price of the business. Should the seller accept financing terms (accepting a down payment and extending a note to the buyer for the balance of the purchase price) the broker's listing agreement usually calls for payment of the fees due, in full at the time of the sale. If the brokerage finds a buyer who is willing to pay the seller's price, a commission is due-even if the seller should reconsider and refuse to sell the business.

Minimum Fee To offset the costs of doing business when selling smaller companies, most brokers charge a minimum fee-typically $7,500 to $10,000 depending on local market conditions.

Listing Term Historically, business brokers asked for a 180 day listing term and would often settle for 90 days when necessary in order to obtain a signature from the owner.

Exclusivity Most brokers demand a "Sole & Exclusive Right to Sell" clause in their listing agreement. This prevents other brokers from selling your business, your franchisor or attorney from helping find a buyer and even you from selling your business without owing a full commission to the broker. Some brokers may be willing to modify their listing agreement to provide for an "Exclusive Agency" permitting only the owner and the broker to offer the business for sale. If the owner finds a buyer (other than those introduced to the opportunity by the broker) no commission will be due. Another, more rare, form is called an "Open" listing. This basically creates a "free-for-all" mentality among all brokers with the first one to find a buyer, receiving the prize of the commission. Most brokers will not invest in advertising your business when they only have an open listing.

PostTerm Protection Should a prospective buyer be introduced to your business by a broker during the term of the listing and return after the listing expires to purchase your franchise, the broker may still be due his commission. The Listing Agreement will address the length of time that the broker is protected in such an instance. Most "Sole and Exclusive Agreements" also state that any buyer becoming aware of your interest to sell during the term of the listing-even if not introduced by the broker- will result in a liability for the commission.

Promises While the typical business broker's listing agreement asks you to make many promises, their promise to you is usually to use their "Best Efforts" in the normal course of business. This is intentionally vague and you should ask for a written clarification of how often your listing will be advertised and how often your broker will give you progress reports. You would be well-advised to obtain a written agreement that you may cancel the listing early if the broker doesn't live up to his promises to you.

Non Disclosure Agreement One promise made by most brokers, is to obtain a signed Non-Disclosure from each buyer prospect, prior to disclosing details about your Agreement company. This ensures that a buyer won't disclose your interest in selling to employees, customers and vendors. It also provides proof that the broker was the one who first introduced the buyer prospect to the availability of your franchise.

Broker Agent The company and the individuals involved in the sale of businesses are often called brokers, or business brokers. In many states they must possess a real estate license or a special license for business brokers. In such states, the head of the brokerage office is specially licensed as the broker while other members of his firm are called agents. Agents must be supervised by a qualified broker.

Co-Broker In order to give your business greater exposure, many business brokers will share their listings with other business brokerage offices. This results in a co-brokerage relationship and typically results in a 50-50 split of commissions if one office holds the listing and another delivers the buyer for the transaction.

Seller Terms Brokers usually counsel sellers that offering "seller terms," taking a down payment and financing the balance for several years is a good way to achieve the greatest price for their franchise. This approach also opens up a larger pool of buyers who don't have access to your full asking price in cash. Typical down payment suggestions range for 25% to 40%. The more established your unit, and your franchise system, the better chance that a buyer will be able to obtain outside financing and pay you in full at the closing.

Asset Sale Most accountants, attorneys, and brokers agree that selling a small business legal entity can pass on unnecessary liability to the new owner. If taxing authorities, customers or vendors make claims on the business, the new owner will have to rely on the seller to defend and pay any liabilities arising during the seller's watch. By selling the assets (only) of the business, the buyer can create his own corporation (or LLC) and not be held liable for actions taken by the former owner.

Offer When a buyer decides that he'd like to own your franchise, he will write an "Offer to Purchase" detailing the terms and contingencies under which he will proceed to a closing. This should be a binding contract with a check to be held by an escrow agent during time between the offer and the actual sale of your business. In multi-million dollar transactions, a "Letter of Intent" is often used. However, in smaller transactions a binding contract is a better tool as it will spell out the items that are important to the parties and bind both to complete the transaction of suffer financial consequences.

Contingencies Most offers are based on one or more caveats-"If the landlord accepts the buyer as a tenant," then he'll proceed toward a purchase. Other common contingencies include acceptance by the franchisor, the ability to verify earnings claims made by the seller, the buyer's ability to obtain financing and the confirmation of the amount of inventory included in the sale.

Counter Offer If the buyer's offer is not acceptable to you, you should develop a written counter offer listing the terms on which you are willing to sell. Should the buyer return a counter offer to you, it is usually best to develop another counter for the buyer's consideration. Once the parties reach final agreement, and both have signed the same document, the offer is defined as having been "signed by both sides" and the parties will begin to take the steps necessary to remove any contingencies.

Due Diligence Most buyers will require that the seller provide proof of the business's earnings. This process is called performing "due diligence" and will usually include a review of the financial records of the business, talking to the franchisor, and the landlord.

Closing Completing the sale of a franchise is far more complex than the sale of an automobile or other item. An attorney should be engaged to draw up the documents to effectively pass title of the business.

If you have questions or comments, please feel free to email us or call The Franchise Doctor at 800 220-8256
jd@franchisedoc.com

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Last Revised: April 11, 2008
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