A business broker helps owners sell a company and helps buyers find one. A business loan broker helps a business get financing. The names sound alike, but the jobs, the clients and the pay are different. When you buy a business, you will often work with both.
Side by side
| Business broker | Business loan broker | |
|---|---|---|
| Main job | Sell a company, or find one to buy | Arrange financing for a business |
| Usual client | The seller | The business that needs funds |
| How paid | Success fee on the sale price, usually from the seller | Commission from the lender at funding, sometimes a fee from the business |
| Typical work | Valuation, marketing the business, screening buyers, negotiating, due diligence | Matching lenders, packaging the file, comparing offers, closing |
| Licensing | Some US states require a real estate licence | Some states register commercial financing brokers |
What a business broker does
A business broker runs the sale of a privately held company. That includes estimating value, marketing the business, often without revealing its name, screening and interviewing buyers, helping negotiate the price and terms, and guiding both sides through due diligence to closing.
Pay is a success fee. Wikipedia's summary of industry practice puts standard US fees for businesses selling for under $10 million at around 10% up to a target price and 12% above it, often with a $50,000 minimum. Fees are negotiable.
Licensing varies. In some US states business brokers must hold a real estate licence, and the same summary notes that every Canadian province except Alberta requires one to start in the field. The International Business Brokers Association is the main US trade body.
What a business loan broker does
A business loan broker focuses on the money. For an acquisition, that usually means finding the lender that will finance the purchase, often with an SBA 7(a) loan, plus any equipment financing, working capital or line of credit the buyer will need after closing.
The loan broker knows which lenders like acquisition deals in your industry, what equity injection they expect, and how they view seller notes and goodwill. That is a different body of knowledge from valuing and marketing a company.
How they work together on a purchase
A typical small business acquisition looks like this:
- The business broker lists the company and finds you as a buyer.
- You sign a letter of intent with price and terms.
- The business loan broker shops the financing. Lenders want the letter of intent, the seller's financials, your personal financial statement and your experience.
- The lender issues a commitment, often with conditions such as a valuation or a seller note on standby.
- Both brokers push to closing. The business broker manages the seller side. The loan broker clears lender conditions.
When the two coordinate well, deals close faster. A lender's questions about the seller's numbers go through the business broker, and the business broker knows early whether the deal will finance.
The fee rules on SBA acquisition loans
If the buyer pays anyone to help get an SBA loan, that person is an agent under SBA rules and must sign SBA Form 159. Form 159 defines an agent to include a loan packager, referral agent, broker, accountant, attorney or consultant.
Under SOP 50 10 8, as summarized by GoSBA Loans, combined percentage based agent fees may not exceed 2% on loans from $50,001 to $1,000,000, with lower caps above that amount and a $30,000 ceiling overall. A business broker paid by the seller for the sale is a separate matter, but if the business broker also takes a fee from the buyer for arranging the loan, that fee belongs on Form 159.
In Canada
In Canada, acquisition financing for smaller businesses often runs through the Canada Small Business Financing Program, delivered by banks and credit unions. The program lends up to $1.15 million per borrower and is open to businesses with annual gross revenue of $10 million or less. A business loan broker who knows which institutions actively use the program can save a buyer weeks. See Canada small business financing.
Questions to ask each one on a purchase
Ask the business broker:
- Has the seller provided financial statements and tax returns a lender will accept?
- Is the seller open to a seller note, and on what terms?
- Have other buyers tried to finance this business, and what did lenders say?
Ask the business loan broker:
- Which lenders finance acquisitions in this industry at this size?
- How much equity injection will lenders expect from me?
- How do lenders view the goodwill in this price?
- What will the payment be, and does the business's cash flow cover it comfortably?
When both brokers answer the same questions about the seller's numbers the same way, you can move ahead with confidence.
Which one do you need?
- Selling your business: a business broker.
- Buying a business: a business broker to find and negotiate it, and a business loan broker to finance it.
- Growing the business you already own: a business loan broker.
Finding a business loan broker for an acquisition
Search the register for brokers who list SBA loans and work in your industry, such as franchises or professional services. Every entry carries a register number and last checked date. If you have a letter of intent in hand, the match form is the fastest route to a broker who does acquisition deals.
Questions owners ask
Can a business broker arrange my loan?
Some have lender contacts, but arranging financing is a separate skill. Most acquisitions go smoother with a business loan broker or SBA lender working alongside the business broker.
Who pays a business broker?
Usually the seller, as a success fee when the sale closes.
Who pays a business loan broker on an acquisition loan?
Usually the lender, at funding. On SBA loans any fee paid by the buyer must be disclosed on SBA Form 159.