If you are considering going into the business brokerage profession, the following information should greatly assist you in making the right decision. If you have already decided to go into business brokerage—welcome! This material will provide you with the knowledge, education, and information you need to start on the road to success. It will give you the “rules of the road,” so to speak.
For those readers still in the decision-making stage, this program will help you in two ways. First, it will provide you with the same knowledge, education, and information as the individual who has already made the decision to become a business broker. Secondly, but more importantly, it will give you the “rules of the road” so to speak. Everyone seems to have their own idea of just what business brokerage is or perhaps what they want it to be. We can’t make the business what you want it to be; we can only tell you what it is and let you take it from there. A common expression today is “think outside the box.” In other words, be creative in your thinking; but you can’t think outside the box unless you know what is inside the box.
Here are the basics and how-tos of business brokerage. If you are uncomfortable with any of the information, you should either rethink your decision about entering the business, or spend some time with an experienced business broker and discuss just what it is that makes you uncomfortable. As with many sports, activities, and business endeavors, you have to first master the basics before you change them. We encourage new entrants to the business to learn the basics and follow them for the first year before attempting to change them. What you will be reading is drawn from experience—the experience of many, many successful business brokers.
Until you have mastered the basics and had a few deals under your belt, don’t tinker with what has worked for many years. After you have been successful, then, certainly, tinker all you want. However, when all else fails, always go back to the basics. In other words, when the tinkering ends up with few sales, reread this information, and start over again.
As you will see, there are many ways to become involved in business brokerage. Very few people leave business brokerage because they don’t like it. The majority leave it because they didn’t pay attention to the basics and consequently weren’t successful. You are making the right step by mastering the basics. What other business can you be in that allows you to control your own time, is always different and exciting, and places no limitations on your earnings? We wish you well in your business brokerage career.
A Brief History of Business Brokerage
We receive many calls from people who are considering the business brokerage field. Invariably they tell us that they are excited to be entering this exciting “new” industry. Perhaps a short history of business brokerage will dispel this idea of a new industry.
A Possible Beginning!
“Slitting Mill and Iron Forge. To be Sold a good Penniworth, a Slitting Mill completely finished and furnished, situated in the middle of near 29 Forges in the Compass of 12 Miles, with a well built Forge with Two Fires, and conveniency for a third; together with a well built and well accustomed Grist Mill, all standing on one Dam; on as constant a stream as this Land affords; with accommodations for other Water Works; A good Dwelling House, Coal House, and above 6 Acres of Land, and a good Orchard upon it, said Works stand on Namasket River in Middleborough, 13 Miles from Plymouth, and 10 from Taunton. All finely situated for a County Seat; and now Lets for 379 Pounds per Annum. Any Person or Persons minded to purchase the same may inquire of the Rev. Peter Thacher of Middleborough aforresaid, or of the Printer hereof, and know further.
N.B. The Reason of this Sale is because the Person wants the money for it, and intending to leave off that Business.”
Boston Gazette, May 11, 1742
No one can pinpoint exactly when business brokerage began—or how or why. However, the above may indicate a beginning and might be one of the first business opportunity ads in the United States. We also suspect, although interpreting the ad is difficult, that Rev. Thacher is one of the first business brokers. So much for business brokerage being a new industry. It is possible that the first business broker was a minister. That might shake up the industry. Also note that in all these years, the reason for sale has not changed! We found this ad in a book titled Every Day Life in the Massachusetts Bay Colony.
There have been many changes during these years. When we first started in the business in 1962, we dealt with the blue-collar worker who was leaving the factory job and was willing to take a chance owning a small business. This buyer would buy bars, small fast-food and coffee shop operations, donut shops, and small retail operations. In 1962, the average price of a small business was about $16,000. Book checks were few and far between, because most owners of these small businesses rarely maintained documented financial statements.
During the ‘70s, the foreign buyers entered the market. They came from many countries, and because of their language problems and their hard work ethic, small business was very appealing. During the late ‘60s and ‘70s, franchising burst onto the small business scene. In many types of businesses, franchises replaced the traditional mom-and-pop business. McDonald’s and Burger King replaced the small town fast-food operations and coffee shops. The large restaurant chains and franchises replaced the family-owned restaurants. This trend continues today.
However, on the plus side, franchising created new opportunities for business brokers. It made available new types of operations to the first-time buyer going into business. For years, business brokers did not sell printing businesses because the prospective buyer had to have a working knowledge of printing, thus reducing the market substantially—then came instant or quick printing. These franchisors wanted business people, not printers. The result is that there is a new industry for business brokers to handle. The same is true for many other industries. Business brokers have had to learn to adapt and be creative.
The ‘80s and ‘90s
In the ‘80s, business brokerage encountered a new entry to its industry—the franchising of business brokerage itself. Prior to franchising, new business brokerage offices were started by those that left their existing offices and ventured out on their own. These people had experience in the business and usually knew it well. Franchising brought in a lot of people who had no experience with the profession, and in most cases no experience in small-business ownership. They faced two major problems: the first was they had to learn a brand new business with only a few weeks of classroom work, and no actual business brokerage experience; and secondly, they had to learn to be small- business owners themselves. Most of these new business brokers had come from the corporate world and did not understand the small-business-owner mentality.
This new business broker had no one to replace the light bulbs, do the typing or administrative work, or even empty the trash. The new owner had to resolve all the issues that had previously been taken care of by the corporation. Additionally, there were no perks or benefits, paid vacations, sick days, or—to make matters worse—no paycheck. Those who realized that they could change the light bulbs and take out the trash succeeded. Unfortunately, many of the new business brokers, when the going got rough, retreated to their offices, shut the door, and studied their business plans. Others, however, went out to where the action was, worked with their agents, the buyers and the sellers, and, consequently, did quite well.
Many of these people did bring something to the table. They understood business and numbers and were comfortable in dealing with outside professionals and advisors. They also brought a great interest in handling the sale of the larger business. Their experience in corporate America provided them with a background, or at least a perceived background, in the workings of the larger business. This allowed some of them to actually make some sales in the mid-size company arena, but also forced others to abandon the business because of the lack of sales—of any size business. The focus on just middle-market-size businesses to the exclusion of the traditional “main street” type of business precipitated their failure.
If the business brokerage business changed with these new entrants, so did the buyer with whom business brokers had to deal. Those corporate people, who lost their jobs through downsizing, mergers, acquisitions, and all the other reasons provided by corporate America did not all become business brokers—many became buyers of businesses. Because of their background, many of them wanted to be CEOs of their company, but had the money to only buy a business that required them to work in it as well as manage it. Others dissipated their funds during the search process looking for that perfect business. Many were overly cautious. If the seller’s numbers weren’t just perfect, they passed, not realizing that no one can buy someone else’s performance. Let’s face it—many of them just did not have the courage necessary to make “that leap of faith” so necessary to going into business for oneself. The late ‘90s were good years for the profession
The first decade of the new century brought many more changes to the business as well as some major highs and lows. Certainly the many uses of technology would be paramount in listing the changes over the past few years. Where does one begin: websites, email, the Internet, the Web-based listing sites, online programs, etc.?
These days, every office must have a website. Whether a seller is looking for a broker to list his or her business or a buyer is searching for the right business to buy, everything now begins on the Internet (for better or worse). The good news is that website options are plentiful and not very expensive.
The growth, if that’s the right way to say it, of the Small Business Administration’s (SBA) programs is also a big change. It got to the point where many business brokers wouldn’t accept a listing unless it had a good chance of being SBA approved. When the financial crisis hit, lending came to a standstill and brokers were reminded, once again, that you can’t always count on third party financing to get deals done. The brokers that returned to the basics were able to hang on during this tremendously difficult time. There is still nothing wrong with seller financing; it has worked for many, many years.
The various listing websites have essentially eliminated business brokers’ dependency on newspaper advertising. There are several benefits to this change. Advertising costs online are much less than in newspapers; you normally pay a flat monthly fee to post unlimited listings, and, since these ads are online, you are able to reach a global audience. A couple in Cleveland that wants to move to Miami and buy a business need only log on to their computer and search the inventory of listings. There is no longer any need to buy a Miami Herald and comb through the classified ads.
The biggest downside has been the fact that buyers now have so much information available to them that they are making up their minds before they ever contact a broker. The newspaper ad was normally three lines and contained just enough information to excite buyers and cause them to call the office and, hopefully, come in to meet with the broker. Nine out of ten times, these buyers bought something other than what they called about. Once the broker learned about the buyer, they were able to match them with the right business, which was normally something the buyer had never considered. Now, with virtually no limit to what the broker can include in the ad, the buyer does so much “research” before making contact that their mind is already made up. They are much more attached to a specific business and much less open to alternatives.
Brokers need to be able to provide enough information in the online listing while still leaving the buyer curious for more and encouraging them to make contact. These online sites are tremendous tools if used properly. Business brokers must always keep in mind that the goal is to get the buyer in the door.
In 2007 it seemed as if anyone could get deals done. Financing was plentiful, confidence was high, and the money was rolling in. By early 2009 many brokers had left the business while many others were picking up paper routes to keep the office lights on. These tremendous swings reminded us once again that the basics of this business always apply. Despite the advances in technology, business brokerage remains a people business. Except for occasional periods where banks seem to give away money with both hands, seller financing continues to drive the small- business market. Those with a mastery of the basics survived the downturn and will likely thrive going forward. One can only imagine what changes the new decade will bring!
What Others Have Said
For our 2007 State of the Industry issue of the Business Broker newsletter, we asked the following question. It adds to our comments about the history of business brokerage in the mid-2000s.
Question: What have been the biggest changes in the business that you have seen over the past few years—technology (what part), the Internet listing sites, etc.?
“For us, the major change has been email and the Internet. We do very little newspaper advertising, and, when we do, we get very little response. We utilize 12 different websites in advertising our businesses for sale. When we send out a prospectus on a business, it is normally an email attachment. We are constantly looking at upgrading our own website and driving more traffic to our site.”
“I used to advertise in the newspaper; now I put the listings on the Internet with different web- sites; it is easier for the buyer to find the listings. Computers and other technology is continually changing so that we have to upgrade our equipment more often.”
“More use of the Internet for advertising; buyer response and information being sent to qualified buyers.”
“Internet for sure; SBA financing a big plus.”
“The Internet is an important force in generating buyer leads. However, the same qualification work is still required. Technology makes us all more efficient and productive—research, writing, spread sheet analysis have all become easier and enable us to more effectively utilize time.”
Only time will tell how the how the 2010s play out. So far, business is slowly improving. There is no doubt that technology has and will continue to dramatically influence business brokerage. We continue to believe, however, that business brokerage will always be a service and people business.
A Personal Journey—California—“Here I Come!”
by Tom West
My many years in business brokerage were filled with many ups and downs. Perhaps a short overview of my years in business brokerage will provide a bit of insight into the continuing saga—and history of the business. The following is from an article I wrote for the January 1987 issue of the Business Broker.
At the suggestion of a family friend, who was visiting my family in Minnesota, I moved to California in 1962. That family friend was our “Old Pro,” and subsequently became my mentor—the legendary G. R. “Russ” Wright. Russ had an office at 2926 W. Lincoln Blvd. in Anaheim, California. (1 block E. of Beach Blvd., as our ads used to say). Just before my arrival, three of Russ’s top salespeople had left to form their own business brokerage firm. I should point out that Russ had been in the business since 1935, so by 1962, he was indeed a pro! (I should also point out that Russ eventually became my father-in-law, but quite a few years elapsed before I married the boss’s daughter). Being the son of friends allowed me a bit more of Russ’s time, and I’m sure he was concerned about my success, but I was really just one of the sales staff.
California was a licensed state, so while I was studying for my real estate examination, I typed the office’s listings for spending money (slow but steady). The office, which had six desks plus Russ’s, did not have a secretary. “Too expensive,” Russ said! While I waited for the test results and, subsequently, my license, I addressed and stamped, with my name and home telephone number, hundreds of “Selling Your Business Cards” and also typed the listings. Also, during this time, Russ showed me how to fill out the listing form and the approach to listing he recommended. He suggested that I buy a 3 x 5 index card file box along with a supply of cards. Each subsequent cold- canvass call, along with “for sale by owner” ads, was to be placed on these cards. This obviously was to be my source of listings.
On the day my license arrived, I bought enough postage stamps to mail all my mail-out cards. But, after the second cup of coffee, Russ gently pointed me to the door and told me that I was to go out and cold-canvass. So, at the tender age of 24, I was shown the door and told to go out all by myself and call on business people, whom I didn’t know, to find out if their business was for sale.
Like almost all rookies, I was scared to death and was absolutely positive that nothing was for sale. Just to make sure I didn’t make any mistakes, I took along a listing book, so I could check to see if any of the places I stopped at were already listed—and hoped they were. To say that I was instantly transformed into one of the industry’s top “listers,” or that I loved cold-canvassing, would be telling you a lie. (My first listing is still for sale.) But, I had moved all the way to California and so far, except for the cold-canvassing, I really liked the business; so I would make my 20 calls a day (less on some days, and on other days, a lot less). Russ had a blackboard by his desk, and our listing productions, by month, were on the board for all to see. We were expected to get five listings a month, and if the office production was less than that, we would definitely hear about it.
My first sale was a coin laundry, and if it hadn’t been for the listing agent who was experienced and who went with me to present the offer, not only would there not have been a commission, but I probably would have had to take money out of my pocket to make the deal.
I was not the top producer in the office, nor was I the worst. There were months when I didn’t know how I was going to make my car payment, and there were months when I worked to the tune of “Vegas, here I come.” The office had experienced people who were more than willing to help and, of course, there was Russ—the master. I learned from the very best, and he would probably tell you that I was a better student than practitioner. But I loved the business and couldn’t imagine doing anything else—and never considered it. Good times and bad times, I was a business broker. (Oh, by the way, my listing card file—it lasted about two months. I should have kept it up, but never was much on organization.)
Russ merged his Wright Company with two former salesmen of his who had left and formed their own company. They eventually owned 10 offices in the Los Angeles area, and I ended up managing their Pasadena office. I was a producing manager, which meant I received a small override on the production of the office, but had to rely on my own sales and listings. After some partnership problems, Russ and the others went their own way. Another salesman and I had the opportunity to buy one of their offices, so in 1965 we added a third salesperson and became the proud owners of a business brokerage office in El Monte, California. We named it United Business Investments, an impressive name for three people.
Like many small businesses, we struggled. We all worked a desk—and there were months when the Los Angeles Times wasn’t going to run our ads without some money, but we survived. And, we had a lot of fun (even though I still had to list). The selling I always enjoyed. Each deal was different, with its own players and unique problems and challenges. I became very good at being able to piece the deals together—patience, tenacity, and a little luck.
However, my partner and I decided to go our own ways, and I now was the sole owner and broker for UBI; but I had lost a top salesman—the partner. It was just about this time that a big wave of franchises hit the small-business scene, which later prompted California to be the first state to enact franchise regulations. A lot of people got hurt, including me. I didn’t buy one, but I had to compete against all the lavish brochures, “supposed” demographic studies, and some of the best salesmen around. I was selling Main Street America, and they were selling Main Street America with “bells and whistles.” However, I survived.
Now that I had paid my dues, so to speak, it was time to expand. I joined forces with another broker in the next town, and now UBI had two offices. It continued to grow and prosper. A young salesman, who had had a couple of good years with us, approached me about joint venturing an office. He would put up half the money—we would split the expenses and the profits—and he would run it. It worked out so well, he bought into the company. Those were good years. We grew and faced all the problems that came with growth. By now we had six offices. When one partner went on vacation and needed additional money, we all took the same amount. We had new Cadillacs, and all the other trimmings of success.
El Monte was doing well, so I decided to open an office right between the El Monte and Pomona offices. This office was right off the same freeway as the others and, for the most part, competed for buyers in the same local newspaper. This new office in West Covina was my first opportunity to be strictly a manager. Now I was directly managing the West Covina and overseeing the El Monte one. Fortunately, and to the credit of the sales staff, this office was profitable right from the start. It never quit. I discovered that all the learning and years at the desk listing and selling were paying off. Business was good; and even when it was bad, a lunch with a partner usually brightened the day. Optimism is indeed a necessity for success in business brokerage. By 1973, UBI had eight offices plus another joint venture in downtown Los Angeles.
In late 1973, we were approached by a small, publicly held company that wanted to buy UBI. I saw an opportunity for UBI to grow even larger; unfortunately some of the others did not and were content to stay small. By the time all the negotiations were concluded, UBI had been sold. I was to continue as its president, and the final result was that everybody got what they wanted.
The “new” UBI grew from its original “8 ½” offices in 1973 to over 50 company-owned offices in 10 states by 1978. This vantage point provided two other opportunities. One, in 1974, we acquired the Wright Company (including the Old Pro and, by the way, I was by then married to his daughter). The second was that I was now in a position to look at the industry from a national viewpoint. In early 1979, I was approached by some New England venture capitalists to start another national business brokerage firm—my one condition was that it be franchised. Company-owned units presented many management problems, so franchising seemed like a solution. Little did I know that franchising presented its own set of problems.
I moved to Boston in April 1979, to help start what was to become VR Business Brokers. The family followed after school ended. I should add that the Old Pro also moved east temporarily to help launch VR. I left the presidency of VR in late 1983 to pursue a consulting and writing career. Although I’m not out listing and selling, I am still very much involved in business brokerage. Except for my first job with Dun & Bradstreet after college and the military, my whole working life has been in business brokerage.
How Large Is the Business Brokerage Industry?
Let’s start off with this often-asked question. There is a common misconception that there are a lot more business brokers today than ever before or that the country is saturated with them. Neither is true. In fact, the number of business brokers has remained fairly static over the years. There was a high of 3,712 firms in 1992, with a low of 2,970 firms in 1996. In 2006, there were 3,399. We have used data from InfoUSA (American Business Lists) as the source for the number of business brokerage offices.
Due to the recession covering 2008 to 2011, the number of offices and those people practicing business brokerage decreased considerably. Things slowly began to pick back up in 2011. However, our estimate of the number of business brokerage businesses brought the number down to less than 3,000, even lower, we feel, than in 1996.
A major difference between the early years and today is the increase of business brokerage firms that are just sole practitioners. Many of them have assistants and are probably more efficient than if they had an office with agents. Our surveys indicate that even in offices with agents, the owner is the most productive person in the office. Many of these owners are responsible for well over half of the office’s actual revenue. If there are a few more firms today than in years past, the total number of people involved in business brokerage is still significantly less.
A General Overview of the Number of Businesses in the U.S.
Assuming that there are approximately 300 million people in the U.S. and that there are approximately 3,000 business brokerage firms in the country, that equates to about one business brokerage firm for every 100,000 people. If we also assume that there are about 5.6 million businesses (perhaps a bit on the high side) with one employee or more, there is one business for every 50 people and one business brokerage firm for about every 1,850 businesses. We say that those are pretty good odds.
- One business for every 50 people
- One business brokerage firm for every 100,000 people
- One business brokerage firm for every 1,850 businesses
Since the figures above really don’t change significantly over the years, the above ratios won’t change enough unless one is into the subject. The above figures are an approximate general picture of the business brokerage profession.
What Does a Business Broker Do?
People who are buying a business are buying an income stream. Many are, in fact, replacing a lost or unhappy job situation. It is a serious acquisition, probably the most important one most people make. Keep in mind that real estate almost always maintains some intrinsic value, while the value of a business is based on the cash flow, or success of the business itself. No cash flow, very little value—in most cases.
The sale of a business involves many emotional issues. The seller has probably put many hours and much effort into the business. His or her decision to sell has to be an emotional one. After all, the sale of a business is the end of one person’s dream, and the beginning of another’s. Many of these dreams end with ultimately the decision to sell. As you will soon see, the reason for the sale is very important to the selling process—perhaps the most important one. Business owners sell their business for a variety of reasons such as: retirement, poor health, partnership or marital difficulties, “burn-out,” or lack of business success.
In addition to the emotional issues, the sale of a business usually includes the involvement of outside professionals and advisors. Many of them are reluctant to put their “seal of approval” on any business transaction. No matter how good the deal, it is much safer to say “no.” The seller may also have family members to consider, since most privately held businesses are family owned.
The prospective buyer also has many obstacles to overcome. Does he or she have the necessary funds to purchase the business? Do they feel comfortable in their ability to operate the business? Can they convince their family that this is a good move? And, finally, all buyers, as we have mentioned previously, have to be able to make that “leap of faith” that is necessary to go from prospective buyer to business owner.
A business broker is involved in all this. The actual sales process is full of what business brokers call “landmines,” which are lying in wait to “crater the sale.” Outside advisors are only concerned about their particular client or customer, not making sure the deal closes. In spite of this, we always recommend that buyers and sellers use outside professionals and advisors who are deal oriented.
It can be difficult being in the middle of all this, and, yet, if the business broker does not function as the catalyst, the sale will probably never close. It is an exciting profession. The thrill of putting the deal together successfully is just as rewarding as the fee that is earned at the closing of the sale, if not more so! The more you learn about the business, the more successful you will be at it. There is an old adage in the business that business brokerage gives you an “MBA in people.”
What Kinds of Businesses Do Business Brokers Sell?
Here is a breakdown from a survey conducted by Business Brokerage Press on what types of businesses are sold by business brokers.
|Food and Drink related
|Other (coin laundry, routes, etc.)
|Service (dry cleaning, quick print, video, etc.)
What Is the Average Price of the Businesses Sold?
Statistics indicate that the sale of Main Street type businesses make up about 80 percent of all businesses sold. This percentage would certainly not be the same for the dollar value, only for the number of businesses sold. The average sale for the Main Street type business is about $300,000 not including inventory or real estate.
Businesses on the West Coast sell for about five percent more than on the East Coast with the Central States selling for about five percent less than the East Coast. Until the recession of 2008, prices increased in all three regions of the country by about five percent. From 2008 through 2011, prices remained static. In fact, due to the overall sluggishness of the economy, the selling prices of most businesses actually decreased. Selling prices are usually based on sales and earnings. Unfortunately, asking prices are usually based on what the seller would like to get, rather than what the sales and earnings dictate.
The Biggest and Smallest Sales
In a survey conducted by Business Brokerage Press, a series of questions was asked: What was your biggest sale? How much did it sell for, and what type of business was it? And, what was your smallest sale? How much, (or should we have said, how little) did it sell for and what was it? These questions brought some very interesting responses.
Many of those in the middle market business have felt that business brokers are slowly, but surely, moving into their arena. In fact, we suspect many business brokers are already doing middle market deals. The nice thing about all of this is that most business brokers have not forgotten their beginnings. Here are some of the results to the questions.
The largest sale reported was a dental device manufacturer that sold for $160 million— now that’s a big deal. Here are some others just to show you what size deals are happening out there.
|Direct Mail business
And, to give some idea of what else sold for well over $1 million in selling price, here are others, in no particular order:
(With the price of gas today, the inventory must have been included.)
And last, but certainly not least, a Strip Club (their words, not ours) sold for $3.8 million. There were 154 responders who reported at least one sale over $1 million.
Plus, there were the usual manufacturing and distribution companies. It should be noted that included in the above list are such businesses as a convenience store, a truck stop, and a restaurant— Main Street is growing up.
We have always felt that business brokers were quite capable of handling the larger deals, but there was a growing fear that they had forgotten their roots, so to speak. We are now reassured, and here’s why: 200 of the business brokers who responded sold at least one business with a price under $100,000. And, to carry it a bit further, 133 had at least one sale under $50,000. In fact, 30 of the sales reported as the lowest sale in an office were under $10,000. One broker reported a sale of $0 and the seller paid a $12,000 commission. Now that was sale with a full price of -$12,000.
So, Main Street is alive and well!
How Do You Get Started?
Now that we have some idea of what a business broker does and approximately how many there are, the next question is “How does one get started in the profession?” Technology has made getting into the business much easier and has given business brokerage practitioners a “virtual office.” There are quite a few options. Following are the major ones:
- You can work in an existing business brokerage office.
- You can open your own office and work as a sole practitioner.
- You can work in a “100 percent commission” office.
- You can work independently in a “shared office” complex.
- You can work independently in a home office.
- You can open your own office and recruit and train your own agents.
Here is an explanation of each of the options mentioned above, along with some of the advantages and disadvantages:
The Existing Business Brokerage Office
The first option is to become an associate or agent for an existing firm. The terms associate and agent are interchangeable. You usually become an independent contractor for an existing business broker. In states where a business brokerage firm must also be a licensed real estate firm, you will generally have to obtain your real estate sales license and then work for a real estate broker for a prescribed period of time until you can become a licensed real estate broker.
When considering which firm to work with, it is important to consider the amount and quality of the training you will receive. If the owner or manager is not willing to train and guide you, it might not be the right firm. We think that we have provided much of what you need to know, but nothing can replace the guidance of an experienced business broker. It may greatly reduce the time it takes to make that first sale. Obviously, there is a price to be paid, in that you will be receiving only a percentage of the total commission. However, that may be a small price to pay for the expenses absorbed by, and support provided by, the firm.
Joining an existing firm has several other benefits. It already has an established track record with an existing listing base, and a backlog of existing buyers. There is also much to be said for the advantages of working with experienced business brokers on a day-to-day basis. Experience does rub off.
The second option is to join a new business brokerage firm, which does not have the same advantages as joining an established office. The owner of the new firm may be as new and inexperienced as you are, and the office may not have an established listing or buyer base. However, it does have one big positive. There is nothing like the excitement and enthusiasm of the new office. Everyone is pitching in to make the office successful.
The decision is entirely a personal one. We always feel that you should do what makes you the most comfortable—do what feels best!
Going It Alone—Being a Sole Practitioner or Opening Your Own Office
Some of you who are reading this may be going to go into business brokerage on your own. If so, you have another decision to make. Do you enter the business as a sole practitioner, or do you open an office and recruit new people?
Sole practitioners operate almost 40 percent of all business brokerage firms. There are several advantages to this method. One is that it is the least expensive way to start, posing very little downside risk. It allows you to learn the business in your own time and at your own rate of speed. You don’t have to worry about recruiting new people or worrying about their success, or lack of it. You can focus entirely on learning the business and closing sales. After all, that’s what it’s all about.
The disadvantage is that many people prefer working with others rather than by themselves. The life of a sole practitioner can get pretty lonely. One of the enjoyable features of the business is sharing “war stories” with other people who can appreciate the foibles of business brokerage—and there are many of them.
To be successful as a sole practitioner, one has to be a self-starter. Without that attribute, it is too easy to just go through the motions. One also has to have the discipline to work in a home office—if that’s what you are going to do. There can be a lot of distractions—children, the television, or other “temptations” that are not normally available in an office setting.
The “100 percent Commission” Office
There is another way to enter the business without opening your own office or joining an existing firm. You can align yourself with a real estate firm that is one of the “100 percent commission” offices. This can provide you with a base to work from and the necessary services to make the job easier. There are also other people to talk to and work with—they won’t usually be business brokers, but it is always nice to have someone to share ideas, or coffee, with once in a while. Real estate licensing can be a problem in these offices. However, you can develop a good source of leads and referrals from a real estate office environment. Another possibility is to align yourself with an accounting or bookkeeping firm. There are natural referral sources in these firms.
If you are going to work with/for someone, the office, telephone, advertising (usually), and the administrative support is usually furnished by the office owner. Some offices defray the cost of advertising; others do not. If you are going to operate your business from one of the “100 percent commission” offices, you will have a monthly fee to cover rent, office support, and other miscellaneous expenses. You will, most likely, be paying for your own telephone, advertising, copying, faxes, and other miscellaneous personal expenses.
Regardless of which of the two above options you select, certainly the first is the least expensive way to enter the business. However, you will be giving up a portion of any commissions earned to help defray these expenses. The pluses are that there is very little financial downside; you will hopefully have an experienced manager to teach you; and there will be other agents to work with and learn from. And, if licensing is a requirement, you will be working under a broker and gaining the requisite experience to obtain your own broker’s license.
The Shared Office
Many professional complexes offer meeting-room space, on an as-needed basis. Perhaps you have an attorney or accounting friend who will let you “rent” a conference room. Executive office complexes are perfect for those sole practitioners who want to work in a shared facility. There are office services provided in addition to conference or meeting rooms. These shared office spaces often have answering services, mailing facilities, and secretarial services that can be used on an as-needed basis. These offices also have the advantage of providing the opportunity to grow and to let you add additional people. Some business brokerages that have several agents continue to use shared office complexes.
The Home Office
About half of sole practitioners work from a home office. With today’s technology, many people who call business brokers have no idea where they are calling. We talk to many business brokers, almost on a daily basis, and we have no idea, without asking, whether they are in a huge office, a home office, or sitting in a lounge chair in their pajamas. Sole practitioners do need a place to meet prospective buyers. Although almost everything can be done from a home office, it is difficult to meet buyers in a home environment. While working from a home office is, for the most part, widely accepted, the sole practitioner must have a professional environment in which to meet clients. Executive suites often provide an inexpensive solution, renting conference room space on an hourly basis in addition to providing a physical mailing address outside of the home.
Opening Your Own Office
It is always difficult to open your own office, recruit and train new people, and try to put a few deals together yourself. You will need more capital to do this than to work as a sole practitioner. The advantages of opening your own office are that you have more people getting listings, and therefore deals should begin to close more quickly. The more people—the more listings. If one person can obtain, and service, ten or fifteen listings, then five people should get over fifty listings—or so the reasoning goes. Obviously, someone has to constantly motivate the people to do this—or replace the people—and that’s your job.
Opening your own office does require a larger financial commitment than the other options. However, the rewards can be larger, and you can manage rather than just “do.” Some feel comfortable working and training others. If you feel that you are a good manager, and have the necessary financial resources, this might be an attractive option. Opening your own business brokerage office can be a very rewarding experience—both financially and personally.
After reading this material, you should be able to determine how you want to enter the business. Or you may realize that business brokerage is either the worst idea or one of the worst ideas you have ever had.
Some business brokers today are sole practitioners. We’re not convinced, however, that the world of business brokerage is shifting from the traditional office of a broker with associates/agents to the business broker operating from his or her home or a small local office. The major advantages of being a sole practitioner are:
- You don’t have to worry about recruiting, training, and retaining salespeople.
- Salespeople can’t leave and create competition.
- Your total work time can be spent on doing deals.
- Overhead is kept to a minimum.
- Legal exposure is greatly reduced.
- You can plan your time without concern over sales staff.
- You can get a lot accomplished without the interruptions of salespeople.
- Fees and commission belong to you totally.
The major disadvantages are:
- You’re only as profitable as your own last deal.
- You have to do it all.
- When you’re away, the business is also.
- You’re not building anything.
- The pressure is all on you.
- You have no business to sell.
- You better not have a sustained sales slump.
- You need most of the same equipment as an office with salespeople.
- You can get very lonely without other people to talk to.
- You don’t have any of the energy and healthy competition that comes from working in an environment with other brokers.
We just talked to one business broker who has been a sole practitioner for about ten years. He doesn’t like his income being totally dependent on his own activities, and we suspect from his comments that he’s pretty lonely out there all by himself. We have also noticed that sole practitioners tend to talk longer on the telephone than those who have people in their offices—another sign of feeling isolation in the workplace.
Many brokers who are not sole practitioners are frustrated with the difficulties of recruiting, training, and retaining salespeople, as well as keeping the office going. And, in many cases, they also have to make deals themselves to make a living. If they had to do just one or the other, the idea of having an office with sales associates might be more appealing. We talked to one very successful business broker/manager who said that he was much better at doing deals than running the office and wants to find someone who could manage the office, leaving him free to do what he does best.
The problem today is that the traditional office of yesterday, with only four to six salespeople, has a problem supporting itself and an owner/manager. The economics are much different today. Keep in mind that today’s office is more costly to run than even five years ago; keeping pace with today’s technology is expensive. The decision, then, boils down to one of the following:
- Operating as a sole practitioner (with or without an assistant)
- Operating as a sole practitioner in a “100% commission” type office
- Running a small operation with one or two salespeople
- Becoming an industry specialist
- Building an office with ten or more salespeople
- Merging with another office or opening another office to allow some of the overhead to be spread out
Business brokers are an independent lot and not very creative when it comes to moving ahead or straightening out a financial crimp in their business. Some business brokers are, however, creative in their approaches to the problems of the industry. One successful business brokerage firm not only has made some of its top performers partners, but it also has, over the past few years, purchased several other firms, whose owners have also become partners. That’s certainly one way of growing. Another business broker has made his top performers partners under a buy-in plan. In addition, we know of one business broker who opened an office in his home, but has agents working out of their own homes, thus creating a complete home-based business brokerage office. Others are creating similar networks or are franchising in order to grow.
We’re certainly not opposed to those brokers who have consciously made the decision to operate as sole practitioners, whether from their homes or an office. Many are successful and quite content with their businesses and their lives.
For those, however, who want to build a business with one sales associate or more, here is what you have to do. The first order of business is to recruit. You want people who are willing to work more than 40 hours a week and need to earn a minimum of $50,000 a year. They come in all sizes and shapes—male or female! Contact the human resources departments of companies that are downsizing. Tell them you are recruiting. We always liked people who had never been in the business before—(“we prefer to train,” was a line in many of our recruiting ads). Develop a training program—use whatever you have to. The information we are presenting here provides good training material.
The biggest job is to juggle the recruiting and training with running the office, retaining the salespeople, and making money without dropping any of the pieces! You don’t make people partners in the business until they’ve earned it, but you still have to retain the good people. Don’t worry about the superstars—you either have to make them partners or you discover that they’re just not worth the trouble. You build a business on the steady producers.
Keep your producers happy by paying attention to them. Many times, just telling them that they did a good job is reward enough. Invite them to your home for dinner. Send them out to dinner. Reward them with a gift, especially after an important or really tough closing. Remember that it’s the thought that counts. Provide an assistant to those who are your top producers or after they have made x dollars. Get rid of the losers, so your winners can earn more! Understand that you are a manager and that you are building a business.
Look for new opportunities. Merge with the office in the next town. If you have the people and the nerve, open a second office. You should stay in the first office on the premise that it is the “cash cow” that will support the second office until it is profitable. Joint venture a second office with one of your best salespeople, assuming he or she has the capital—and also the nerve to do it. Become a member of a franchise if you feel it is a good fit and that it can do something for you and your office. Keep in mind that a franchise is a good exit vehicle. It is usually easier to sell a franchised business brokerage office than a non-franchised one.