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Key questions to ask in selecting a broker

A good business broker is worth their weight in gold by ensuring that the seller attains the maximum value for their business on acceptable terms.  A bad or poorly performing broker can be disruptive to the sales process, leaving the seller frustrated and questioning exactly what value the broker is bringing to the table aside from a hefty bill.

The decision as to whether to use a broker or to pursue the For Sale By Owner (FSBO) route is one that a practice owner will have to make relatively early in the sales process.  For those sellers that wish to use a broker it is imperative that they appoint a firm that is experienced, has a track record of performance and understands the local accounting and tax market.  In short they need to add real value to the sales process.

It is therefore critical that the seller undertakes a proper thorough appraisal before appointing a broker.  Below we have outlined some key questions that practice owners should consider asking brokers in order to sort the 'wheat from the chaff'.  Don't be concerned about being too specific when asking questions.  Remember that this is effectively a supplier selection process and any legitimate, qualified and successful broker will welcome detailed questions about their ability, experience and track record in brokering practice sales.

1. Experience
a. How long have you been a broker?
b. Are you a specialist (accounting and tax broker) or do you sell a diverse range of businesses?
c. What certifications and qualifications do you have?
d. Are you an independent broker or do you form part of a larger group?
e. What geographical area do you cover?

The key here is for sellers to determine the experience and qualifications of brokers and to ensure they have a complete picture of the background of the broker that will be handling the sale of their practice.

Ask the broker what licenses and certifications they and their firm’s have.  There are an array of qualifications and certifications out there varying from real estate licenses to valuation (CVA Certified Valuation Analyst) and brokering specific (CBI Certified Business Intermediary).  Also ask them to clarify if they are required to hold a license to broker the sale of businesses in the State that your practice is located.

Ensure that you understand which broker will be handling the day to day sale of your practice.  Be aware of situations where the principle broker (the 'rain maker') initiates the sales process before handling day to day detail to another broker within the firm.  In these circumstances ensure you determine the experience and qualifications of the other broker that you will be dealing with on a day to day basis.

2. Sales Record
a. How many accounting/tax practices do you list per year?
b. How many of these practices are sold?
c. What is the average percentage sales price to asking price for these practices?

There is nothing like a proven track record to inspire confidence, and the number of practices that the broker sells per annum should give a good indication of the volume of business that the broker is handling.  Be wary of a broker that sells too much (danger of not receiving a personalised service), or a broker that sells too little (they have little to no experience in this sector). 

The average actual sales price to asking price should help identify broker's that deliberately inflate sales prices in an attempt to win business. 

The sales to listings ratio should give an indication as to the ability of the broker to 'close a deal'.   It may also highlight how selective the broker is in taking on clients.  Brokers that are happy to take every sales opportunity that comes across their desk will have a low sales to listings ratio when compared to a broker that is more selective.  Selective broker are more likely to invest time and resources into the transaction.

3. Marketing, price and terms
a. How and where will you market the practice?
b. What price will you market the practice and how will you derive that price?
c. How many registered buyers do you have in your buyer pool?
d. What terms of sale can I realistically expect to achieve?

Brokers will play a pivotal role in marketing your practice and it is important to understand what plans they have and what resources they will dedicate to it.  Look for brokers that have a number of marketing weapons at their disposal and who understand how to tailor their efforts to find the right buyer for your practice. 

Take a quick look at the broker’s website and their online presence (Twitter, Linkedin, Facebook).  This should give a good indication as to the professionalism of the firm and whether they utilise modern techniques to engage with the new generation of technology savvy accountants and tax professionals.

Also ask to see if it is possible to get examples of sales memorandums and marketing literature that the broker has produced for previous clients to get a feel for how much effort the broker puts into producing what will be one of the key documents in the sales process.

Detailed questions about valuation and price should provide an indication as to the broker's understanding of the local market as well as their experience and understanding of business valuation methods.  Be wary of broker's that focus only on 'perceived' industry standard valuation methods relating to 1x gross referral income.  These methods should be a guide at the best of times and an experienced broker will need to see a full set of financials and recast the number's to highlight the seller's discretionary earnings in order to ascertain the full earning power of the practice.

Most brokers will have a database of interested buyers.  However, the key thing to determine here is how many will actually be interested in your practice.  Ask specifically how many buyers on their database are 'active' and that have registered an interest in firms of your size in your geographical area.  I would even go further and define active into 3 distinct categories (i) Broker contact with the potential buyer in the last 3 months, (ii) between 3 to 9 months and (iii) and over 9 months.

Brokers who are experienced in the local accounting and tax market place should be able to discuss some of the likely terms you will achieve with the sale of your practice, for example 'all cash at close' or alternatively some form of 'earn out' agreement.  As a seller you should be looking for transparency, integrity and honesty from your broker and this question enables them the opportunity to express their views and opinion.  Be wary of brokers that over sell your position.  A good broker should manage a seller’s expectations and keep them realistic from the outset.

4. Fees
a. What are the broker fees and how are they structured?
b. Are there any upfront fees?
c. Do you require exclusivity and for how long?
d. What happens if I change my mind and withdraw from the sale?
e. What happens if I withdraw from the sale and sell to a business you introduced to me at a later date?
f. What am I getting for this fee?

Fees vary from broker to broker and are likely to fall somewhere between 10% and 15% of the final sales price.  Much will depend on the marketability of the practice.  A good practice in a sought after metropolitan area is likely to sell more easily than a similar practice in a less populated out of town location, and the fee structure is likely to reflect the additional marketing effort that will be required by broker.

The important factor is not to get bogged down at this stage by looking purely at the percentage fee.  It is equally important to understand the small print of the contractual agreement that you will be entering into with the broker, particularly any penalty clauses that could come into play should you withdraw the sale of the practice at a later date.   These details should form part of your overall decision making process when comparing broker to broker and your appetite to business risk.

Also bear in mind that it is always worth asking about any flexibility in rates or in terms.  Leave it as an open question at this stage but don't hesitate to negotiate rates more actively prior to signing on the dotted line with a broker. 

5. References
a. Can you provide a list of references

Brokers live and die by the strength of their referral network.  A good broker should be willing and able to provide a number of referrals from a variety of resources.  Try and get as broad a spectrum of referrals as possible from both buyers and sellers as well as  lawyers, lenders and financial advisors that the broker has worked with in the past.

Choosing a broker is akin to any supplier selection process, and practice owners looking to sell their business need to put in the necessary legwork and research in order to identify a broker that can assist them with the sales process.  Understand that this will not be a one way street.  Good brokers will undertake due diligence on you and your practice before agreeing to take you on board.  If they don't be a little concerned!

Author:  Dan Crowley, CGMA