Everyone's heard of brokers: stock brokers, mortgage brokers and even marriage brokers. But what is a business broker? It's a little known and less understood segment of the real estate industry. Simply put, a business broker assists individuals (or companies) buying or selling a business, a concept similar to a residential real estate agent in the housing market. However, that's about the end of the similarity.

A Few Statistics
There are approximately 25 million businesses in the United States. The vast majority of these businesses have no employees–real estate salespeople, consultants, nannies, etc. Discounting these, there are about 5.6 million businesses with employees, of which 20 percent are for sale at any one time. Ninety percent of the businesses for sale are offered "for sale by owner" – FSBO's. However, according to the U. S. Department of Labor and the SBA, more than 50 percent of the businesses that sell are sold through business brokers.

Build vs. Buy
Every year, thousands of people consider entrepreneurship via one of two routes; either buy an existing business or start one from scratch. Each course has advantages and disadvantages to consider.

Starting your own business can be very rewarding. But you need to have a unique product, technology or service. Let's face it: there are very few "new ideas" out there. Individuals should complete a thorough evaluation of the marketplace, competition and need (a business plan). Perhaps you can start from home with no employees and greatly reduce the initial capital investment.

However, you may need to support yourself (and family) with personal savings. It may be months or years before profits are sufficient to provide the level of income needed.

Obtaining financing can be very difficult with no track record and no customers. According to the Bureau of Labor Statistics, the chances of survival for a start-up business is only 25 percent.

Buying an existing business may be a more efficient, but often more costly, way to business ownership. Existing business owners expect a premium for providing an existing customer base and location.

Existing businesses normally can obtain financing from financial institutions–they have established history, assets and a proven idea. The seller often provides a portion of the financing in the form of a loan.

Established businesses are also less risky because they have relationships with suppliers, an operating process, and employees that are already hired and trained. In addition, there's an existing cash flow to provide immediate income to the buyer. Experts generally agree, in most cases, that paying the extra cost for an existing business outweighs the risks of starting one from scratch.

Selling Your Business
In residential real estate, sellers want everyone to know their home is for sale to accomplish the greatest exposure. Rarely is this the case for businesses. An owner typically doesn't want anyone to know his business is for sale. While Realtors deal in the number of bedrooms and baths, square footage and nearby schools, business brokers deal in revenue, cost of goods sold, expenses, inventory and overall business valuations, recasting, income tax returns, profit and loss statements, leases, etc.

Business sales must be conducted in the strictest confidence to protect the ongoing viability of the business. If word gets out that a business is for sale, employees flee, competitors pounce, suppliers fret and the entire future of the business is in jeopardy. How many "Business For Sale" signs have you ever seen? Additionally, businesses are valued on the basis of their cash flow and thus the value of the business may decline as the attention of the owner is focused on the sale.

The Solution
In many cases, the seller pursues a "for sale by owner" route towards the sale of his or her business in an effort to avoid paying a commission to a business broker.

However, the shortterm reality of paying a commission is overshadowed by the benefits of having a seasoned veteran. In residential sales, the home and land serve as collateral allowing the buyer to obtain traditional financing. In a business sale, much of the value is in the intangible goodwill. Banks are left with very little to foreclose on should the business fail under the new owner.

For that reason, owner financing is a major issue in business sale transactions. In these cases, the seller has a tremendous stake in knowing the buyer, not just the buyer's ability to operate the business, but his reputation and personal financial condition as well. Too often, a seller will find that he or she has been misled by a buyer who subsequently ruins the business and jeopardizes the ultimate repayment of the loan.

Using a business broker can actually increase the cash that remains in a seller's pocket after the sale. A good broker works in the best interest of both buyer and seller throughout the transaction. A broker understands the many pitfalls inherent in business transactions, maintaining confidentiality throughout the process and qualifying the buyers' reputation and financial capability. Brokers also assist in structuring the various financial options available, enabling the owner to do what he does best—run his or her business.

Considering the pros and cons, the stakes in buying or selling a business are simply too high to proceed without competent representation. While a FSBO can make sense in a residential transaction, it seldom pays dividends in a business sale.

Daniel Younkins is a Licensed Business Broker with Sunbelt
Business Brokers of Jacksonville and St. Augustine. He can be
reached at (904) 992-2223 or via Email at younkinsd@aol.com.