You’ve worked too hard and too long to risk selling your business by yourself. You need a professional who knows how to sell businesses, where to advertise, and has industry contacts. The chances are you’ve not sold many businesses in your career, and now is not the time to learn.
Engaging Your Broker’s Services
When seeking a broker to sell your business, your due diligence is required in selecting the most suitable firm. Some things to think about:
– You want to know how your broker will advertise your business and their budget for this purpose. – If your sale is confidential, you’ll want to know how the broker will advertise, yet keep your identity unknown. – Does your broker think a cash sale is best for you, or a price with terms? – Determine that the broker is a good fit for your type of business; has the firm previously sold a business of your type and size, and in your location? – Remember that time kills deals… so is the broker experienced in moving the process along rapidly? – Be clear about the frequency of contact you expect from your broker; if you want frequent updates, say so. – Find out how quickly the broker responds to buyer inquiries, and the protocol for moving prospects forward. – Inquire about how many listings the broker has and determine if he or she is too busy to be a good selection for you.
Reviewing the engagement proposal
Once you have selected the broker you believe will do the best work for you, the broker will require you to sign an engagement letter detailing your working relationship. This letter states the terms of the services and the fees you will pay. Most engagement letters have standard language; some of the elements you should expect are:
– The services you are hiring, such as preparing a marketing brochure, working with specialists on your behalf, advertising your business’s availability, filtering inquiries, and recommending worthy prospects. – Limitations of the services the broker will provide. – A term for performance; 3 – 24 months is typical. – Client’s responsibilities in support of the effort. – A disclaimer describing the broker’s potential for performance. – A description of the fees, discussed below.
The broker’s fee
Brokers are compensated either hourly, through a success fee, by a retainer, or by combinations of these options. Here are some details:
Success Fee: A success fee is a commission based on a percentage of the sale price, or a dollar amount. Typically, a success fee is between 5 – 12% and the smaller the sale, the higher the percentage.
Advisor’s Fee, or Retainer: Brokers expect to be paid for their hard costs and minimal services whether you sell or not. If the sale is successful, their fees may be deducted from the success fee. The retainer may include the advertising budget and other upfront costs the broker will commit to doing, such as meeting with members of your professional team.
Reverse Fee: As mentioned above, most of the time a broker will present a graded fee schedule with a higher fee percentage for a smaller sale price. A reverse fee schedule works like this:
Assume that you and your financial planner have determined your business has a value of $700,000 and you have set this as your top price. The broker tells you they charge 10% on all sales under $1 million. However, the broker also tells you his firm will try to sell your business for over a million, and if they do, will you be willing to pay 15%? Do the math and you’ll see that a reverse fee is desirable.
Consult your business broker or attorney with questions about the terms of your agreement