Business broking while being aligned to the real estate industry is essentially considered a much more difficult type of sale in comparison to the sale of a house or home unit due the complexity of:

 

  • understanding the seller’s business and financial information
  • reading and understanding the terms of the current lease
  • looking for deal breakers and deal makers that will either hinder or enhance the business sale such as long lease, low rent or short lease and high rent
  • ascertaining an appropriate multiple of earnings or ROI (Return on Investment) that best reflects the value and risk level of the business
  • the terms and conditions of a Business Sale Contract

 

One main difference between selling residential real estate and leasehold businesses is the fact that completed residential sales are registered with the Titles Office and the details are accessible by real estate agents or data collection companies to complete the required CMA (Comparative Marketing Analysis) to gain a house listing.

 

Business brokers have no such official data collection of business sales information as sales and details of the transaction are not registered and to make things even more difficult, similar types of businesses can have vastly different positive and negative points as they can be in popular or unpopular types of industry and have vastly different expenses, operating hours, owner’s input or staff expertise.

 

Each business has to be assessed based solely on the information provided to the business broker by the business owner and once the adjusted net income available has been assessed, then an appropriate business valuation methodology can be used to calculate a reasonable asking price for the business.  Certain business valuation methodologies work well when calculating the price of a specific business while other valuation methodologies can be considered to be totally inappropriate.

 

A business broker must be familiar with several business valuation methodologies which all take time and training to learn as to when and how to apply. Business brokers must take the time to examine and understand:

 

  • the operational details of the business
  • the financial details of the business
  • the popularity of the industry the business operates in
  • the risk level for operating this type of business
  • the potential for bank funding for the business
  • the appropriate valuation methodology to apply to the business
  • the selection of an appropriate multiple of earnings or ROI (Return on Investment) percentage to ascertain a reasonable price

 

A prudent and astute business broker or real estate agent selling businesses would normally not be expected to pluck an accurate asking price for a business out of the air on their first visit to a business without having time to assess all of the business data.  They would be doing their potential client a disservice by not taking the time to properly assess all of the business and financial details and then calculating a reasonable selling price based on their business sales experience and knowledge of the various business valuation methodologies.

 

Many brokers still approach potential listings by rushing out to see them first and then asking for the business information.  In this day of high speed communication and advanced computer programs, most business owners already have their financial information in a format that is easily sent via email to the broker to start their assessment of the business and set a realistic selling price.

 

The broker should formulate a simple set of standard ‘on-the-phone’ questions to ask potential business sellers when they first enquire about listing their business for sale.  More in-depth detailed business operational questions can be ascertained via further phone calls or supplied in writing and sent as an email, fax or even the old fashioned way arriving by mail.  The amount of information received can be substantial when the seller provides financial statements, BAS Reports, a full lease and rent invoice and other detailed business information and can arrive without the broker ever leaving their office.

 

If a business broker does not request all of the above information, would it then be considered that they have not used their best endeavours and professionalism or been prudent in the pursuit of a business listing?

 

If the broker does not conduct a proper assessment of the business information before listing the business for sale and cannot provide a substantial amount of business and financial information to a potential buyer, would the broker still be considered as being the relevant person being the effective cause of the sale?

 

The broker is seriously putting their commission at risk, if they have not taken the time to prepare the business information to be supplied to potential buyers, and if all of the business information had to be supplied directly by the seller to the buyer.

 

A question regarding what the broker has provided to earn their commission can now come into question and sellers can dispute what the broker has done to assist with the sale, putting the broker’s commission into jeopardy and leading to possible litigation.

 

Business sales can be a more litigious area than residential sales, as the business information can be open to interpretation. Therefore it is important that all facts are fully validated and provable by the agent and the business owner before marketing the business for sale.

 

Written by Business Brokers Queensland Partner Ron Frank, this article originally appeared in the Real Estate Institute of Queensland (REIQ) Journal.

 

 

Share on Facebook+1Share on LinkedInShare on Twitter

Tagged: ,

Follow: Subscribe to this post's comments