When you should avoid using a broker
Because business brokers charge a sizeable commission for selling your business, using a broker is not always necessary if you want to sell your small business.
And brokers can have hundreds of other clients, with often only a small number of staff to handle all enquiries. Anecdotally, 96 per cent of businesses listed with brokers never sell.
In the end, nobody is going to love your small business as much as yourself, so why not handle your sale yourself?
Being able to respond to background checks and due diligence queries directly is another plus, rather than having to wait days for your broker to forward questions from your buyer.
Because you do not have to factor in broker fees, you can offer you can find yourself selling your small business without a broker for more.
And because you are not tied into a broker, there is no penalty if you do change your mind and take your business off the market.
That said, Clinton Lee, a consultant who specialises in helping sell businesses, believes that all but the smallest businesses would benefit from using a reputable broker.
However, if your turnover is less than £1m or your profit is less than £100,000 per annum, it is simply is not worth a broker’s time to put in the 200 hours of work needed to properly market and sell a business, says Lee.
Daren Moore, group commercial director of accountancy network TaxAssist Accountants, agrees.
Moore says: “I’ve always questioned the need for a broker at the smaller end of the market. For very small businesses, I don’t think brokers offer anything particularly valuable. I do like the idea of businesses being more self-sufficient and taking things into their own hands. There are some good brokers out there, but brokers can be expensive, and small businesses who do use a broker often question the value of their service afterwards.”
How can I sell my business without a broker?
The truth is, more often than not, you already know your buyer. That could be a customer or a supplier or a business rival.
Most small businesses are sold in trade sales, selling to another business. Whichever sector you are in, you should know who is on the acquisition path. Most sectors have active acquirers in them.
Draw up a list of potential buyers and you could ask your professional advisers, an accountant or a lawyer, to discreetly approach them.
Moore says: “Small businesses tend to get mopped up by acquirers who are pretty good at tracking them down and identifying their targets. Most small businesses have people knocking at their door or communicating with them regularly, who are interested in acquiring them.”
How much is my business worth?
That’s the $64,000 question, as they say.
Toby Harper, founder and CEO of law firm Harper James, says the truism is that a business is only worth what someone is willing to pay for it.
Any business owner wants a valuation, but they don’t necessarily want to share with buyers what that valuation is – they want to invite interest.
Business valuations are mostly based on multiples of past profits. According to business broker Transworld, 2x profit is a good rule of thumb. Any business that owns a freehold is going to be worth more – hotels, for example, according to James, can be valued as high as 10x net profits.
Your accountant could also offer a basic, cost-effective valuation for your business.
Another method is to trawl aggregator websites selling small businesses for firms that similar to yours and creating a spreadsheet listing asking price/turnover/profit and then calculate asking price as a multiple of profit. You can then calculate the average asking price.
Harper says that most businesses try to value their businesses not only on historic performance but also on future prospects to show potential and what the firm could achieve.
This, says Lee, is a great mistake.
‘How do you tell a new mother that her baby is ugly?’
Lee says: “I’ve seen it time and time again. Small businesses are advertised on the basis of what they will achieve in the future, despite not having got there over the past 20 years. How do you tell a new mother that her baby is ugly?
Harper agrees that business owners themselves do tend to overvalue their own business and only discover that later in the process when they’re getting offers worth as little as 10 per cent or 20 per cent of their valuation.
“There’s an awful lot of emotion wrapped up in business valuation. There’s obviously a sense of pride wrapped up in what people have built,” Moore says.
“Business owners tend to think about all the positives in their business and they tend to ignore the negatives. There’s no point in going through a process if seller and buyer expectations are massively apart. Generally speaking, business owners don’t think about what their business is worth but what they need personally to retire or move on.”
Lee adds: “The biggest mistake small business owners make is believing they have something of huge value when it may have little or no value at all. Don’t even bother to value your business. For a very small business, it really is whatever you can get. You can’t put a range or a number on it.”
Lee says that a small number brokers pick a number out of the air so that you list with them – only for your business not to sell because it’s been gathering dust on the broker’s shelf for over a year.
Lee says: “The truth is, most small businesses will not sell. I know this is very pessimistic.”
And even if your business does sell, it’s rare that you get all your money at once. There are earnouts, deferred consideration sums, warranties and contingencies.
“It’s quite often that owners get less than they thought because there are terms and conditions in their sale agreement that they hadn’t quite thought through,” says Moore.
You do need to find a lawyer…
However, you can’t find yourself in the business of selling your small business without a broker single-handed. You will need to bring in a specialist lawyer who can help your handle negotiations and legal matters.
…and you will need to find an accountant
An accountant can help with valuation, help produce financial information and refer to legal advice providers. Sometimes, your accountant is there for you just to share your problems and worries with.
Step-by-step guide to selling your business direct
- Identify if you have a sellable business. Talk to your accountant to see if they think it’s viable as a going concern. Between 50-60 per cent of small businesses are really a lifestyle rather than a proper business, with no growth potential.
- Decide on an asking price. Your accountant will be able to advise on this. The important thing is to be unemotional about the figure.
- Put a non-disclosure agreement in place. Something that protects your intellectual property. There are unscrupulous competitors out there who will try and glean information about your business.
Should I list on a businesses-for-sale website?
Selling your small business through an online platform could save you up to 15 per cent on fees usually paid to brokers for marketing and commission, as well as speed up the process.
However, you can get a lot of timewasters on these aggregator sites.
The most interest your brand-new listing will get will be in the first month before tapering off. You will probably get another bump if you reduce the price several months after first listing.
The truth is, says Lee, is that 95 per cent of businesses listed on business marketplace sites do not sell. Mainly, this is because the asking price is too high, and, as a result, a business can sit on one of these sites for a year gathering dust.
Lee says: “There’s an arrogance that I see in some of these ads, where they come across as somehow doing the buyer a favour by even listing the business for sale.”
According to industry body iTabb, BusinessesForSale, Daltons and RightBiz have the same spread with about 55-60 per cent of listings having an asking price of under £100,000, and about 75 per cent of listings falling under the 250K mark.
Which websites list businesses for sale?
Calls itself the world’s largest marketplace with 62,788 businesses for sale on the site right now, just under 5 per cent of which are sold privately. Around 14,000 of these businesses are based in the UK. BusinessesForSale gets 1.2m unique users per month and 1.8m page views.
Retail is the most popular type of business for sale, followed by food.
BusinessesForSale says that historically it has taken anything between 6-9 months to sell a business. However, with Covid-19, the time taken to sell a business will inevitably take longer and sale prices reduce.
12 months: £199 to advertise with a money-back guarantee if you don’t find a buyer within a year of your start date.
Selling site BusinessTradeCentre has around 200 businesses for sale at any one time and gets around 8,000 unique visitors a month. Specialises in bars, commercial property, digital businesses and service business.
At present, it is free to list on BusinessTradeCentre.
More than 26,000 businesses for sale are listed on its website and typically 90,000 business buyers visit the site every week or about 400,000 monthly buyer visits.
Service companies are the most popular type of business for sale, followed by food.
1 month: £129 + VAT
3 months: £199
6 months: £269 + VAT
RightBiz says it is the largest UK business-for-sale online marketplace, averaging monthly 2.1m page visits and 17,000 enquiries each month. The site says that in 2019 it was averaging 8,000 new accounts per month, rising to 10,000 in Q3 and Q4.
The site partners with over 400 business brokers offering businesses for sale and food is the most popular category of business for sale.
1 month: £129
3 months: £169
6 months: £249
What buyer information do I need to provide initially?
- Financial year accounts going back three years
- An energy performance certificate (EPC)
- Three years of accounts
- Management accounts bringing things right up to date
- A non-disclosure agreement (NDA)
What happens once heads of terms have been agreed?
Heads of terms set out the agreement, which can be as simple as a one-page memorandum or run to multiple pages. It’s more normal for the buyer to produce the heads of terms, especially if you’re not using a broker.
How long will it take to sell my business?
If your small business does get an offer though, the process of selling can taken anything between three months and six months. BusinessesForSale says that it takes anything between six months and nine months.
The buyer will have a lot of questions for you and any offer will be conditional, subject to due diligence.
And the speed of the sale will depend on how motivated each side is. Generally speaking, the seller will push to sell quickly having made the emotional decision to sell, while the buyer wants to slow things down through due diligence.
What documents do I need to provide for due diligence?
The buyer’s solicitor will produce a questionnaire, much like a house buyer’s HIPS pack, which you, the vendor, will have to answer as fully as possible.
Due diligence is really about the buyer understanding what they’re taking on, which could involve legal challenges or other things they can’t glean from financial records. It’s about the acquirer protecting themselves.
Other documents you will need to provide include:
- Company registration certificate
- VAT certificate
- VAT returns
- CT600 filings
- Asset inventory
- Employee records and holiday entitlements
- Order book
- Customer list
- Staff retention policies
- Composition of balance sheet
The reason why many business sales go awry is not because of bad faith on either party but because information is missing or overlooked.
The most important thing is to be totally transparent, rather than have a deal fall over at the last moment, having already cost you thousands in unrecoverable legal and accounting fees.
Harper says: “By holding back on issues, they will only come back to bite you in the rear further down the line. It’s better to get it out in the open early on. Be totally honest as early as possible. I’ve seen deals fall over at the last minute because there wasn’t that full disclosure, having incurred £15,000 worth of costs for the seller.”