How to Become a Business Broker or M&A Advisor

Someone called the other day and after discussing buying a business for a bit, the real reason for his call came out. He asked, "By the way, how do you become a business broker?" We talked a while, but I thought I would write down more thoughts here. I didn't remember his name, but maybe he'll find this here.

There are a few key ingredients in becoming a good business intermediary. There is so much to it, so many different aspects, that I think it is impossible to learn everything on the job. You need to have an education and background that eliminates at least some of the learning. I think that is one reason why there is such a high wash-out rate for new brokers. There is a lot to it, and there can also be a lengthy time before you get paid anything (it is entirely based on success fees).

The key ingredients, in my opinion:

• Business ownership experience helps greatly, as you can empathize with the owner
• An MBA degree is helpful, but at least some finance and accounting is needed to understand P&Ls, balance sheets and tax returns
• The ability to speak and communicate easily and comfortably with business owners
• The ability to multi-task: spreadsheeting one minute, negotiating the next
• A true self-starter that can manage their time
• Integrity and an intense sense of fairness
• Did I mention that Business ownership experience helps greatly?

I was uniquely qualified for it, with an MBA, having started and sold companies, and having worked in mergers and acquisitions. But when I started in being an intermediary I was lost on a few areas that I hadn't dealt with before.

So, given that you have the necessary qualifications, where do you start? The easiest is to link up with a larger brokerage or M&A firm. Business brokers = smaller businesses under around $1 million in sales.  M&A = larger businesses, over $1 million.

Business brokers operate in the real-estate model, with a broker managing the office and sales agents below him. The good ones offer a training program, mentoring, or at least somewhere to turn when you are stuck. Be aware, that like the real estate office, you are expected to do most of your own marketing. Like any business, marketing is key and many business brokers don't understand that.

M&A firms are typically a little different, but the same issues apply - what kind of support, if any, does a larger company bring?  Some M&A firms do very little for their "deal makers", although just the fact there is a larger organization helps land deals.  Some help a lot by doing back office work like writing the sales prospectus, financial analysis, marketing, etc.

You can go out on your own, and many try that and just limp along or fail. Some make it, but you really must know what you are doing to be out there alone. For example, over half the businesses that list don't sell. Usually it is the inexperienced or struggling broker that takes weak or mis-priced listings, and then beat themselves up trying to sell something that can't be sold.   It can take a year to sell a company, so you could work hard for a year - and then end up with zip.

For business brokerage there are the national brokerage franchises: Murphy, VR and Sunbelt being the largest. Often these will have the largest offices in a particular city. These are mainly known as "main street" business brokers handling smaller businesses.  The M&A space is a little fragmented with some operating like business brokerages while many operate as one company with many dealmakers as independent contractors.

If you really want to be out on your own immediately, you can buy a smaller franchise from Sunbelt, Murphy or VR, if available in your location. They will help you get started, but please see my list above. They may say they can teach you everything, but they can't.  Regardless of who you end up with, continued education is important and I'm constantly surprised that more brokers don't pursue it. IBBA provides some truly great broker education and with their help the industry is getting more professional all the time. If you become a broker, take some courses. Please.  On the M&A side the M&A Source (part of IBBA) and ACG are good sources for education.

Then there is the money, or lack of it for a period of time. It takes about nine months on average to sell a company and it could take a lot longer.  If you are just starting out then it may actually be more than a year before you have significant income. Even then your income may be light for a while until your deal flow ramps up. I know, that is tough to take. A main street business broker should have around 7 to 10 listings working at one time to make a good living, less for M&A. Commissions are generally 10% of the selling price of the business (less for M&A), but of course if you work in a larger office there is the "office split" and your marketing expenses so you usually end up with quite a bit less. Still, if you work hard to get quality listings, they will sell and you can do quite well.

I'm not trying to be pessimistic, just realistic. Once you are going it is a great job and you get to see some interesting companies and work with some truly wonderful people. I've even heard of one guy in southern California that works six months a year, closing a couple of deals and then takes the next six months off. Urban legend probably. I know I couldn't pull that off.

In many states, California included, you must be a licensed real estate agent or licensed with FINRA for M&A transactions (I did both). Although occasionally real estate is involved, very little of it has to do with real estate, but since we are a small industry we are stuck being regulated by the DRE. It would be nice if there was a business intermediary specific endorsement. (Nevada of all places is leading the way there).

UPDATE 2009:   Probably not a good time to start, folks.  I get quite a few emails from people interested in this profession, but there are not a lot of deals getting done, especially in main-street business brokerage.  I've heard that a number of brokers are leaving the industry (which may make it a good time to join, if you can hang in there until the market picks up).  Larger M&A transactions in the middle-market are still getting done,but less than a few years ago, so its still tough to enter the market.

UPDATE 2011: Getting a tad better, and if you can last a year without income it actually could be a good time to start.  You'll be able to learn and come up to speed as the market comes back.  Then again the market is coming back very slowly, so perhaps it would be best to wait another year before jumping into this profession.

Want to learn more?  You can download a free ebook that includes informaton about the profession at:  www.compasspointcapital.com