Can a Truly Small Business use a Business Broker?

Can a Truly Small Business use a Business Broker?

How do I sell my small business?  

That’s the driving question that many small business owners lead with.  Most owners that plan to “go to market” intend to do so through the services of a business broker.

So, Can a Small Business Use a Broker?

We’re small business owners at Exit Oasis, so we’re always willing to take advantage of a high quality short-cut.  In this case our short-cut is to share Barbara Taylor’s (Allan Taylor Mergers & Acquisitions) excellent post Is My Business Too Small for A Business Broker? 

Taylor does a great job of describing how broker’s view business size.  She outlines how the M&A world categorizes businesses by their sales volume:

  • Main Street (Annual Sales < $5M)
  • Lower Middle Market (Annual Sales $5M to $50M)
  • Middle Market (Annual Sales $50M to $500M)
  • Upper Middle Market (Annual Sales $500M+)

Taylor’s article is an important, straight-forward read for any small business owner looking at engaging a business broker.

It Never Feels Like They Want Me

It’s not uncommon for small business owners to feel like small change when they approach a conversation with a business broker.  It’s important that you understand why that might be.  Looking from the brokers perspective, while your potential listing might be good news, it isn’t necessarily the best news.

Understandably, business sales professionals go where the money is.  As Taylor’s article points out, brokers work based on a percentage commission – so bigger is almost always better.

For a broker, a listing for a business worth $1,000,000 might represent a commission of $100,000.  It’s important to remember that a $1,000,000 business is not twice as hard to sell as a listing worth $500,000 with a $50,000 commission.  In fact, all other things being equal, the larger business is probably much easier to sell.

The broker is hoping for the big score, so when you walk through the door with your small business there might be a little let down on their end.  And given the difficult odds of selling any business, brokers have a floor they set for their compensation.

Even Main Street business brokers who work with small, mom-and-pop businesses usually have a minimum commission, often in the $10K to $25K range. Knowing that the average commission is 10% for business brokers, a minimum commission of $25K may mean the business broker works with businesses that sell for at least $250K.

The point here is that most business brokers and M&A advisors have a cut-off point in terms of their commission; an amount below which they typically won’t go.

Small is Big, but it Never Feels that Way

The reality that “bigger is better” for the broker contributes to a huge misconception for many small business owners.  We read constantly about big M&A deals.  We see articles and promotions – mostly focused on the middle market deals.  Brokers want to attract those deals, so that’s what they talk about, write about and who they target their promotion for. 

They want the “big kill”.

And it can lead us as small business owners to the perception that most businesses are bigger than we are – but the truth is the exact opposite.

If we take a look at the US marketplace of businesses, we see that the M&A media coverage doesn’t reflect the marketplace at all.   Using the sales categories listed above and plugging in the data provided by the Small Business Administration we see that small business crushes the other categories when it comes to number of firms.

Annual Sales Number of Firms
Main Street <$5M

5,359,731

Lower Middle <$5M to $50M

322,447

Middle and Upper <$50M+

43,982

But the small business dominance goes even further if you add in the firms that the SBA categorizes as “non-employers” (firms that are sole practitioners, etc.)

Add non-employers Annual Sales Number of Firms
Main Street <$5M

29,196,668

Lower Middle  <$5M to $50M

322,447

Middle and Upper <$50M+

43,982

While we’ll see 1000 times more stories about Facebook’s next acquisition than we will about the sale of a small business – it’s the small business deals that dominate by the numbers.

So, when you’re ready to explore a sale, walk through the door of the broker’s office with confidence.  Your deal size dominates, even if they’ll probably wish your sales were higher.

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