BUSINESS BROKER

Business Broker Industry – Part 2

You want to launch a business? It could appear simple, but trust me it is a very complex job. The procedures involved in purchasing and selling a business are frequently difficult and complex. It is not a task that you should attempt on your own, that’s why many people rely on the knowledge and skills of business brokers to streamline each step and increase their chances of a positive conclusion.

What is a Business Broker?

Business brokers operate as intermediaries between buyers and sellers of a business. A broker can assist you in finding businesses for sale that meet your criteria, such as location, industry, and size, if you’re looking to purchase an existing business. Basically, business broker is a professional who ensures the success of the selling or buying process, a trustworthy broker will walk their clients through each step. They ask the correct questions to ascertain the client’s needs and the most effective ways to meet those demands.

Business Brokers have more contacts than you have. The brokers, in other words, can reduce the amount of legwork to a trickle because they are well-connected in the small company world. Finding leads on your own will take months as opposed to hours.

A business broker is a person or organization that aids in the acquisition and disposition of small, downtown enterprises (Investopedia).

A knowledgeable business broker will delicately handle and address delicate inquiries and concerns that, if made directly between the buyer and seller, could harm or destroy the prospects for closing a purchase (Simmons)

Why are Business Brokers Necessary?

Any method of buying or selling business comes with its share of challenges and complications that people who haven’t done it before are likely to find very challenging. A Business broker is available to simplify each procedure. Before starting a business, you should consider a number of factors.

Tasks of a Business Broker:

Business Valuation: With regard to valuing enterprises that are valued in relation to industry, geography, operational strength, and financial history, brokers have experience and in-depth understanding.  

Examination: Thorough examination of pre-qualified companies to ascertain their advantages and disadvantages.

Paper work: Manage the acquisition’s paperwork and legal aspects.

Help in obtaining finance: Brokers come with experience and offer expert financial guidance, because finance can be so complicated at times, a company may not actually require the financing it believes it does. Broker can help eliminate the confusion that which financial option is handy.

Help with negotiation: Negotiating can be a difficult task. You may navigate this difficult process with ease if you work with an experienced broker who is aware of the potential risks. They will guarantee open communication between the parties and support it.

Protect confidentiality: There is an agreement regarding confidentiality with business broker, for the most part, the broker is in charge of maintaining the secrecy of your business transaction.

Act as an escrow agent: During the sell of a business, the business broker, several days before the closing date, asks the buyer must deposit the necessary amount. This shows that the buyer really does have the money and that the seller gets paid the amount specified in the contract.

What is the Business Broker Fee?

Usually business brokers will charge you with two primary fees for their work.

  1. Commission Fee: Normally, this fee is paid once a sale is successfully closed. This fee can be determined on the value of the company.
  2. Retainer Fee: It is a flat fee that Buyers pay either in one lump sum or on a monthly basis.

How to Select a Business Broker?

  1. Checkout IBBA (International Business Brokers Organization): An organization that offers a useful tool for locating brokers in your area in USA, that are knowledgeable about the industry you’re interested in.
  2. Referrals: Ask for recommendations from previous clients.
  3. Research: Make sure you do your own due research on the broker to make sure you can collaborate with them. Look into their history, experience, and educational background.
  4. Transaction History: Look over their internet reviews and see if they have a history of transactions that have been successfully completed

Business Broker Industry in USA:

In the US, 80% of companies with employees make $1 million or less each year in revenue. These are categorized as Main Street establishments. This is a sizable market, and it’s typically here that business brokers begin their careers (Caffery).

In 2021, more than 5 million business owners submitted applications—the most ever seen in the United States. Counting Houses. Likewise, 21% of company purchasers identified as being a part of the big resignation, and business brokers report that 23% of their queries were from newly unemployed individuals or corporate refugees looking to buy a business (IBBA).

(IBIS World) estimates that there are currently 4,058 businesses operating US, a 0.21% rise from 2021, which has a market value of about $1 billion. California has the most business brokers in the US with 2,714 enterprises, followed by Florida with 2,182 businesses, and New York with 1,240 businesses. These specialists are performing a role that is getting more and more in demand as Mergers & Acquisitions activity levels rise.

According to a research by BizBuySell, as more entrepreneurs want to buy valuable businesses from retiring Baby Boomers, the demand for existing enterprises is anticipated to persist through 2022. While some buyers and sellers will be first-time purchasers and corporate emigrants, many are also current business owners hoping to grow as well as retirees searching for a second career.

New owners in the market:

There are currently more owners on the market. Retirement is the leading cause of owner sales, followed by burnout. According to IBBA, the number of clients increase in the second quarter of 2022. Main Street businesses that are being sold (values $2MM -$50MM) the lower middle market (values between $0 and $2MM) in q2 of 2022.

(Source: IBBA Market Survey)     

(5 points scale) 

In terms of revenue, the business brokers market reached $1.3 billion in 2022.

Over the course of the five years between 2017 and 2022, the number of businesses in the US market for business brokers increased by an average of 0.2% annually.

Why Business Broker Industry is Underdeveloped in Pakistan?

In Pakistan, when businesses fail, they close their operations completely rather than selling the business. In addition to this, the inflation is increasing day by day and that is the reason why many startups are failing in Pakistan. Between April and May 2022, inflation jumped from 13.37% to 13.76%, making it more difficult for businesses across Pakistan to survive.

But apart from that, there are few unanswered questions that why there is no business brokerage industry in Pakistan? what are the barriers? The country is dominated by small-scale businesses, then what are the reasons that the business broker industry is so underdeveloped in Pakistan?

Let’s discuss.  

The major reasons for an underdeveloped business broker industry in Pakistan are:

  1. Businesses are not Registered: In Pakistan, people don’t usually register their business. Even though everything is available online and businesses can register themselves easily but still, out of millions of small-scale or large-scale enterprises only 176, 502 companies are registered with Pakistan’s Securities and Exchange Commission (SECP) with only 26502 companies registered in 2022.
  • In the fiscal year 2022, 33% of businesses were registered as single member corporations, compared to approximately 64% that were private limited companies. 3% were registered as foreign businesses, limited liability partnerships, not-for-profit organizations, and public unlisted firms (LLP).
  • In Pakistan, small-scale businesses don’t keep money in their bank account because as soon as money starts flowing in, you need a bank account to manage and collect it, and in order to get one, they require registration. Many business man thinks that there is no requirement for a current registration prior to that.
  1. No Valuation of Businesses: There is literally no concept of valuation for small-scale businesses in Pakistan. However, in medium-scale or large-scale businesses, the concept of valuation still exists. In small-scale businesses, a potential buyer thinks that the business is valued for its furniture or property. They have no idea of how a business is valued, whether it be by income or assets. In Pakistan, however, the valuation for large scale firms is done by commercial banks and lease firms. Moreover, there are some business valuation firms that are also not prospering, as most of the large-scale businesses trust banks.
  2. No financing Opportunities: There are many businesses that could use capital to support their expansion and create jobs for citizens, but they have limited access to it. Many businesses in Pakistan are not able to obtain financing, neither from banks nor from public markets, the fact that out of 176,502 registered in SECP only 375 companies listed in PSX (Pakistan Stock Exchange). So financing is been an issue for the firms,
  3. Not creating financial statements: Many small-scale businesses don’t keep a record of their cash inflow and outflow, that is a cash flow budget, this budget can be more helpful in day-to-day operations than a typical budget because it shows what is the cash position of the business at any given time. In addition to that, businesses don’t even have proper Profit & Loss statements, which is a drawback for many business brokers because by comparing total revenues to total costs and expenses, the P&L statement shows the company’s realized profits or losses for the given period of time. That is why it is difficult to evaluate many small-scale businesses in Pakistan and this is one of the main reasons for businesses being valued on their furniture and property.

Scope of Business Broker Industry in Pakistan:

Considering the current situation, there is still a lot of hope for business brokerage industry in Pakistan as private equity firms have enormous upside potential in Pakistan, a vast untapped market. Two-thirds of the nation’s population, or roughly 225 million people, are under the age of 30, making it one of the nation’s biggest strengths. There are some programs by government as well to promote startups, earlier in June 2022, at the Pak Launch’s UnConference, a $50 million expansion fund for encouraging startups was declared in an event led by Dr. Nadeem Sherwani.

If the regulatory bodies can collaborate, then a proper framework for valuation and examination of small-scale or medium-scale enterprises can be formed that can help the businesses to sell rather than shut down their operations.

(Further details will be discussed in the next part of this blog)

For Further Study:

  • (n.d.). IBISWorld – Industry Market Research, Reports, and Statistics.
  • Investopedia. (n.d.). Business Broker In Pakistan Results from Investopedia | Search.
  • IBBA. (n.d.). Business Broker Industry Research 
  • Entrepreneur. (2019). Business Broker Definition – Entrepreneur Small Business Encyclopedia.
  • Simmons, S.R. (2021). How Much Do Business Brokers Make | An In-Depth Guide (2021)
  • JD Supra. (n.d.). Private Company M&A Brokers Exempt from SEC Registration

 

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