How to become a business broker

Mono Lake

I write a blog for Allbusiness.com and I am frequently asked about how to become a business broker.  If only business owners wishing to sell would contact me that often. This is how you do it.

There are a few key ingredients in becoming a good business intermediary. There is so much to it, so many different aspects, that I think it is impossible to learn everything on the job. You need to have an education and background that eliminates at least some of the learning. I think that is one reason why there is such a high wash-out rate for new brokers. There is a lot to it, and there can also be a lengthy time before you get paid anything (it is entirely based on success fees).

The key ingredients, in my opinion:

• Business ownership experience helps greatly, as you can empathize with the owner

• An MBA degree is helpful, but at least some finance and accounting is needed to understand P&Ls, balance sheets and tax returns

• The ability to speak and communicate easily and comfortably with business owners

• The ability to multi-task: spreadsheeting one minute, negotiating the next

• A true self-starter that can manage their time

• Integrity and an intense sense of fairness

• Did I mention that business ownership experience helps greatly?

I was uniquely qualified for it, with an MBA, having started and sold companies, and having worked in mergers and acquisitions. But when I started in being an intermediary I was lost on a few areas that I hadn’t dealt with before.

So, given that you have the necessary qualifications, where do you start? The easiest is to link up with a larger brokerage or M&A firm. Business brokers sell smaller businesses under around $1 million in earnings, while M&A firms and investment banks sell larger businesses, over $1 million in earnings.  “Main Street” business brokers sell small mom and pop businesses under $500K in earnings.

Business brokers operate in the real-estate model, with a broker managing the office and sales agents below him. The good ones offer a training program, mentoring, or at least somewhere to turn when you are stuck. Be aware, that like the real estate office, you are expected to do most of your own marketing. Like any business, marketing is key and many business brokers don’t understand that.

M&A firms are typically a little different, but the same issues apply – what kind of support, if any, does a larger company bring? Some M&A firms do very little for their “deal makers”, although just the fact there is a larger organization helps land deals.  Some help a lot by doing back office work like writing the sales prospectus, financial analysis, marketing, etc.

You can go out on your own, and many try that and just limp along or fail. Some make it, but you really must know what you are doing to be out there alone. For example, over half the businesses that list don’t sell. Usually it is the inexperienced or struggling broker that takes weak or mis-priced listings, and then beat themselves up trying to sell something that can’t be sold. It can take a year to sell a company, so you could work hard for a year – and then end up with zip.

For business brokerage there are the national brokerage franchises: Murphy, VR and Sunbelt being the largest. Often these will have the largest offices in a particular city. These are mainly known as “main street” business brokers handling smaller businesses. The M&A space is a little fragmented with some operating like business brokerages while many operate as one company with many dealmakers as independent contractors.

If you really want to be out on your own immediately, you can buy a smaller franchise from Sunbelt, Murphy or VR, if available in your location. They will help you get started, but please see my list above. They may say they can teach you everything, but they can’t. Regardless of who you end up with, continued education is important and I’m constantly surprised that more brokers don’t pursue it. IBBA provides some great broker education and with their help the industry is getting more professional all the time. If you become a broker, take some courses. Please. On the M&A side the M&A Source (part of IBBA) and ACG are good sources for education.

Then there is the money, or lack of it for a period of time. It takes about nine months on average to sell a company and it could take a lot longer. If you are just starting out then it may actually be more than a year before you have significant income. Even then your income may be light for a while until your deal flow ramps up.  That can be tough to take. A main street business broker should have around 7 to 10 listings working at one time to make a good living, less for M&A. Commissions are generally 10% of the selling price of the business (less for M&A), but of course if you work in a larger office there is the “office split” and your marketing expenses so you usually end up with quite a bit less. Still, if you work hard to get quality listings, they will sell and you can do quite well.

I’m not trying to be pessimistic, just realistic. Once you are going it is a great job and you get to see some interesting companies and work with some truly wonderful people. I’ve even heard of one guy in southern California that works six months a year, closing a couple of deals and then takes the next six months off. Urban legend probably. I know I couldn’t pull that off.

In many states, California included, you must be a licensed real estate agent or licensed with FINRA for M&A transactions (I did both). Although occasionally real estate is involved, very little of it has to do with real estate, but since we are a small industry we are stuck being regulated by the DRE. It would be nice if there was a business intermediary specific endorsement. (Nevada of all places is leading the way there).

Letter Number One: Broker Training

 

I received the following letter from the Blog:

I’m interested in becoming a Business Broker. With so many training options out there, it’s confusing to determine which is the best mode for me to use. Seriously looking into ABBA or Brokers Service Network – though there is a huge price difference between the 2. I would rather try to make it a go on my own, rather than in a brokerage office. However, any thougths or suggestions you might have, I would greatly appreciate it!
Thank you, Debra

And my response:

Debra,

I know of ABBA and Broker’s Service Network, but I’ve yet to meet anyone that went that route. I don’t know the costs either.

Another route is to buy a franchise from Murphy Business, Sunbelt or VR. A franchise operation comes with training.  An associate and friend Fred Hall does some of the training for Murphy and he said he was impressed with the entire training package they have.

Finally, you could get training at the twice a year IBBA (www.ibba.org) conference. I’m guessing the IBBA courses are better than some of these others, in that you get multiple courses each taught by experts in that field. I’ve taken a lot of the IBBA and M&A Source courses, and they are very good. What they don’t do is lead you through starting and running your own practice like the other courses

- Ney

Second Letter: Market Timing

“Dear Ney,
I am a recent graduate with a BS in business marketing and a minor in finance. I have been offered a position at a business brokerage. As it stands I do not know an extraordinary amount about the business broker profession and would be extremely grateful if you could answer some questions I have regarding the profession.
I have been offered a position as an agent for a brokerage firm which specializes in selling small companies. Looking toward the future would this be valuable experience (when eventually combined with an MBA) in seeking to gain an opportunity in a Firm representing larger companies or moving into the field of mergers and acquisitions. Would this be an acceptable start to such a career path or would other paths be a better background.
Also with the likely downturn of the US economy what is your perception of the future outlook for the business broker profession.
I realize that Compass Point is not a typical brokerage firm but nonetheless would truly value your opinion on these questions. Thank you for your time.
– Chris”

My response

Chris,

First, you may want to read my post on becoming a business broker.

Be aware that being offered a position in many small business brokerages may not be what you expect. I’m generalizing, and not all are like this, but many are based on the same model as real estate brokers and agents. It’s a numbers game, and the more agents they have the more likely the broker is to make money. Many people are just not cut out to be business brokers and there is a high turnover. Since the broker doesn’t actually pay you directly (its all success-based commission), then there is an incentive for him/her to add quite a few agents and hope that a few stick it out and complete some deals.

Training is the key. If a broker/owner realizes that it truly takes a substantial amount of training and mentoring to make a good agent, then he also realizes that there IS a cost to adding agents. The brokerage houses that offer good training tend to select agents a little more carefully, and those agents tend to last longer.

Marketing is also important. In my opinion the broker should do some “house marketing” to assist all agents. But make no mistake, even then it is up to you to market the heck out of your services to get to business owners. It isn’t easy.

So ask those two questions. What training and/or mentoring program do they have, and what type of marketing assistance do they provide?

You asked if business brokerage is a good step up into doing larger deals. It can be, but there is a huge difference between M&A (lots of financial analysis, deal structuring and selling to other companies) and main street business brokerage (selling to individuals, getting an SBA loan). Still, the experience working with business owners would be good.

One big caution. It takes quite a bit of time to make money as a business broker. It can take a year before you are closing enough deals to make a living wage. It can be a few years of work before your deal flow is decent enough to make good money. If you really are thinking of business school, keep this in mind.

Finally, consider the market.  The recession has made it exceedingly difficult to get small deals done.  Healthy companies are in short supply, financing is tough, and healthy cash rich buyers are not plentiful either.  Fortunately for Compass Point larger deals are still happening.  The small business market will get better, and since it takes some time to fully get up to speed as broker, you might jump in now as long as you have at least a year of living expenses in the bank.

- Ney