When you buy a business (or a franchise) the seller traditionally are willing to pay a finder fee or commission. Brokers will charge anywhere from 5-20% of the purchase price for listing the business. Franchisors will pay referral fees depending on what the total price of the franchise is. How can that be of benefit to you when you are buying your business?
During tough credit times most brokers are willing to carry back some portion of the commission to help the buyer and the seller complete the transaction. Some business brokers live and die by the idea that they will absolutely never carry back a commission, consequently they can and will kill the business purchase. When using these techniques remember that business brokers are professionals and they need to make a living to. These techniques are not to pull the wool over their eyes, they’re merely present to help you negotiate better.
Here are a few steps to get your business broker or franchise consultant to help finance your acquisition.
1. Listen to the first piece of information the business broker wants to know – Several brokers will start off their relationship with a buyer by initially asking, “How much cash can you put down IMMEDIATELY on this business if you were going to buy it?” This is the business brokers’ way of playing poker. Remember the object (the true object) of poker is to get the other party to show the maximum risk they are willing to accept. If you tell the business broker that you have $100,000 then they will try to get you to put even more down.
2. Ask the broker how business is going – This is the thermostat to knowing whether or not the broker is willing to play ball or not. A broker whose business is thriving may not worry about lending a qualified borrower a small amount of money to finish the acquisition. On the other hand a starving broker may be more than willing to lend money to get some portion of the commission.
3. Avoid engaging in a contract directly with the broker – Traditionally the business broker has engaged the seller for a listing. A business buyer can engage a broker to help them buy a business; however in many states brokers do not split commissions. Consequently a contract with the broker with the buyer may lead to a very odd relationship.
4. Ask the seller how much of a commission they are paying the broker – Here is your opportunity to play poke. Most business sellers feel like they are getting nailed to the wall when they are selling the business. They are giving up 5-20% of the business to some guy or gal that the seller considers to be a glorified real estate agent! What did they do in the past 20 years to earn this huge portion of the seller’s retirement fund? I find getting to see the listing agreement is one of the easiest parts of negotiations.
5. Ask the broker where to come up with the remainder of the money – The broker will try to get you to put more cash on the table. The greater the cash you commit to buying the business the more likely you are to close, and be successful with your new venture (according to the business broker.) When and if there is a “boot” or remaining funds that you need to come up with ask the business broker – frankly where to find it at. They may direct you to some lending sources, but a good broker may consider doing a carry back with the seller to accommodate the transaction.