Business brokerage vs. real property brokerage
Determining a price
Business brokerage regulation
Steps in the sale of a business
Business brokerage is effecting a sale or exchange of an existing business. In most cases, the sale of a business entails the simultaneous transfer of an estate in land, whether a leasehold or a fee. Thus to sell businesses, a broker must generally hold a real estate license.
Business brokerage may be classified into opportunity brokerage and enterprise brokerage in accordance with the size of the business being sold, although Florida does not make this distinction. Opportunity brokerage concerns a small business, usually a proprietorship or partnership, where the transaction consists of a sale of assets and an assignment of a lease. Enterprise brokerage concerns a larger company, usually a corporation, where the transaction involves the sale of stock and multiple real estate parcels leased or owned by the seller.
The process of business brokerage is similar to real estate brokerage: a broker
secures a listing, procures a purchaser, and facilitates the closing. Once a ready,
willing, and able buyer is found, the broker earns a commission.
Business brokerage vs real property brokerage
The critical difference between selling a business and selling real estate is that selling a business includes the transfer of business income, personal property assets, goodwill, and, possibly, liabilities, in addition to real property.
Goodwill is an intangible asset that is tied to the reputation of the business and that adds value to the business opportunity. Goodwill is discussed further below. Franchises, copyrights, and patents are examples of other intangible assets that add value.
Another non-real-estate value transferred with a business is the going-concern value, or the monetary value that is expected from ongoing business operations and profits as opposed to the value of just the physical assets.
Among the similarities of selling a business and selling real estate are the facts that both usually involve real property or a long-term lease and both require the broker to be licensed in accordance with Florida Statute Chapter 475, Part I., wherein the definition of a broker and the licensure requirements of a broker include “…the sale, exchange, purchase, or rental of business enterprises or business opportunities or any real property …”
To be competent in this brokerage specialty, a business broker must have specialized skills concerning transactions, accounting, and pricing. A business broker must also rely on a professional team to complete the transaction. Members of this team would include the client’s legal counsel, accountant, and, preferably, a professional appraiser.
Types of sale. There are generally two types of business sale transaction for a business broker to be aware of: the asset sale and the stock sale. In an asset sale, the purchaser takes possession of some or all of the assets of the business, as well as the real estate, in exchange for the sale price. The purchase usually does not include acquiring the existing business entity or its liabilities. An asset sale is preferred by buyers who want to buy only portions of a business, or to avoid liabilities inherent in a stock purchase.
In a stock sale, a purchaser acquires complete ownership of a business, including the legal corporate entity, all assets, all financial liabilities, and any current or future legal liabilities arising from incidents that have occurred prior to the sale. A purchaser may prefer a stock sale to avoid creating a new business entity or to benefit from a possible tax advantage. In addition, a stock sale keeps a business identity intact, which can be very valuable.
Transaction documents. The most common transaction documents in business brokerage are a sale contract, an assignment or real estate sale contract, a no-compete agreement, and a consulting agreement.
A sale contract sets forth all terms and conditions of the agreement, including exactly what is being sold. An assignment or real estate sale agreement is an agreement for transferring any and all real property involved in the transaction. A no-compete agreement is a seller’s covenant, for compensation, not to compete with the buyer under prescribed conditions and time periods. A consulting agreement is an employment agreement that hires the seller to assist the buyer in taking over business operations.
For the most part, transaction documents in business brokerage are not fully standardized. For that reason, a business broker must exercise caution in dealing with document language so as to avoid the unauthorized practice of law.
A broker or agent who wants to undertake business brokerage needs basic proficiency in accounting. In particular, one must know how to read and interpret:
- income, expenses, and profit on an income statement
- assets, liabilities, and net worth on a balance sheet
Income, expenses, and profit. A business’s profit is the revenue remaining from gross income after all expenses have been paid. A business broker must evaluate an owner’s income and expenses in order to determine what the business may be worth to a buyer. This often involves interpreting which income and expense items will change after the business is sold. For example, a seller owns a grocery store and uses family members to perform clerical work without pay. If a buyer is a bachelor without children, much of the clerical work will have to be hired out. The additional payroll suddenly changes the store’s profitability significantly. Neglecting to consider how income and expenses might change is likely to lead to serious problems in working with buyers.
- cash and marketable securities
- trade fixtures and equipment
- real property
- accounts receivable
- the company name
- contracts for future sales of goods or services
- going concern
In valuing a business, both tangible and intangible assets must be taken into account, even though intangible assets may be very difficult to appraise.
Goodwill. Goodwill, mentioned earlier, is a business brokerage term with two meanings. In one sense, goodwill is an intangible asset consisting of any factor that an owner values in the business, apart from any other specific asset. For example, goodwill might include reputation, a long history of success in a market, name recognition, a dominant market share, and an excellent business location. In the second sense, which is more familiar to accountants, goodwill is the difference in value between an owner’s price and the value of all other business assets. For example, if an owner wants $400,000 for a business, and the totality of tangible and intangible assets is valued at $320,000, the goodwill is an $80,000 asset.
Determining a price
The most difficult task for a business broker is often finding the proper price range for a business. An owner of a smaller business has probably built the business from scratch and tends to overvalue it. Moreover, such an owner may have incomplete and disorganized accounting records, making the valuation of assets quite difficult. Finally, a business’s true income may be different for one owner than it would be for another because of variations in management style and ability.
In any case, the value of the business is a function of the following:
- past, present, and future net profits, and capitalized value of these
- amount of risk and certainty associated with realizing future profits
- value of all assets as reflected in the books of account
- impact of goodwill on the value of the business
- prices paid for similar businesses
- all other risks associated with the business
Business brokerage regulation Licensing. A business broker generally must have an active real estate license. In addition, the broker may need to have a valid securities license since a transaction may entail the sale of securities.
Uniform Commercial Code (UCC). The Uniform Commercial Code regulates the sale of personal property on a state-by-state basis, and forms the basis for standardized sale documents. Standard documents include promissory notes, security agreements, and bills of sale.
Bulk Sales Act. The Bulk Sales Act protects creditors against loss of collateral in an indebted business through the undisclosed sale of the business’s inventory. If a business sells over half of its inventory to a buyer, the act declares that the sale is a bulk sale, and, as such, is potentially an asset sale. Since a creditor could lose security in such a sale, the seller must disclose the names of creditors to the buyer in a Bulk Sales Affidavit. The buyer must notify the creditors of the sale, who may then take appropriate action to secure their loans.