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You Get What You Pay For: The Effectiveness of Business Brokers and The Sale Process

Posted: November 15, 2010, 1:45 p.m., EDT

When my partners and I sold our pet store--The Animal Kingdom in Dallas--in the early ‘90s, we turned to a local business broker for help. One year into the process, we had just one offer for about 25 percent of our annual sales. We weren’t thrilled with the outcome, but we took the offer because the partnership wasn’t working (that’s a story for another time!), and we needed to get out. I swore that if I sold another business, I would be more careful about who I let help me sell it. It’s ironic that 20 years later, I am working in the related field of investment banking. It’s certainly helped me in terms of knowing what clients want and don’t want when it comes to selling their business.

As such, I found the recent article in the Wall Street Journal highlighting the ineffectiveness of business brokers quite interesting. While many small business owners are still turning to business brokers for the sale of their business, the effectiveness of broker services are producing abysmal numbers, causing many experts to question the future of business brokers.

According to BizBuySell, of the 31,856 listings in the third quarter this year, only 1,117 were sold. That amounts to a successful close rate of only 3.5 percent.

Selling a business
So why are business brokers still in business? Because they typically offer a no-cost option for selling a business. However, the statistics show that you get what you pay for. Even though it’s no-money-down, the time invested in the process ultimately proves expensive and takes your focus away from your core business.

The weak efficacy of brokers is usually a sign of one of two issues:

1. The business owner doesn’t have a realistic understanding of the market value of his/her business.

2. The market won’t support the business owner’s value expectations or needs based on earnings or results.

Before putting your business up for sale, I’d recommend taking these two steps to determine whether it makes sense to move forward:

1. The first step is a properly prepared valuation. Armed with a valuation, business owners can confidently go to market and demand top-dollar for their business. Conversely, if valuation expectations don’t align with market value, the business owner avoids a long, drawn-out sale process that inevitably steals time and focus from the operation.

2. Find someone--perhaps a CPA or financial advisor—to help you determine your "Personal Number.” The number you need to sell the business for that allows you to either retire or feel that you derived satisfactory value for your hard work. If #1 and #2 align, then it’s time to talk to a reputable business broker or investment banker.

I can tell you from first-hand experience that the process of selling your business, when done right, can be one of the most rewarding experiences of your life. Having reaped the rewards of years of hard work, I now live in my favorite city in the country and have launched a new career that I absolutely love!

The Wall Street Journal article can be found here.

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You Get What You Pay For: The Effectiveness of Business Brokers and The Sale Process

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