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This is the second part of a series on business brokers.
Recently, I talked to a prospective client about their sale journey to date. They were working with a broker and, after a few unsuccessful third-party suitors, decided they wanted to sell to an internal buyer—a key employee. My thoughts immediately went to the broker contract—was this seller going to owe the broker a full commission on a buyer who was literally in the seller’s business all along, or had he carved this out of the broker’s agreement? Since most broker agreements have standard verbiage and “trail” for up to two years (meaning you could still end up paying a broker even after you stopped working with him or her), I’m guessing this seller is going to be paying a hefty commission, even on an internal sale. That’s an expensive lesson.
If you intend to hire a broker to assist you in selling your business, understand this—a broker agreement is a contract. Please have someone review it. You should also negotiate it. The contract always favors the broker, and when you don’t negotiate, you leave money on the table.
Here are a few things you should look for and negotiate in a broker contract:
1. Scope of Services: The agreement should detail all the services the broker will provide. This includes business valuation, marketing, buyer screening, due diligence assistance, negotiation support, and assistance through closing. If the broker isn’t going to provide a service, make that clear. Written expectations reduce the risk of disputes over what services are to be delivered.
2. Exclusivity and Duration: Most business brokers will request an exclusive agreement, meaning you cannot engage another broker during the term of the contract. Carefully consider the duration of this exclusivity. Typical terms can range from six months to one year. Selling a business takes a long time, but I think the shorter period with extensions is better. If the broker hasn’t done much, you will want to switch it up sooner rather than later.
3. Commission and Fees Structure: The agreement should clearly state the commission rate, any upfront fees, and other charges. Commonly, commissions range from 8% to 12% of the sale price, but don’t take that as fact. Everything is negotiable. Also, don’t allow high upfront fees with lower accountability for performance or vague terms about additional expenses that the broker might incur and pass on to you. You need certainty here.
4. Arrangements for Introducing Your Own Buyer: It’s crucial to negotiate terms for scenarios where you bring your own buyer. Some brokers might still expect full commission if you find a buyer independently, like the situation the potential client I had above found himself in. Aim to negotiate a reduced commission if you introduce the buyer who successfully purchases your business. The agreement should include clear terms about what constitutes a broker-introduced buyer versus a seller-introduced buyer. As I mentioned, this can be an expensive lesson if you don’t have the right framework in place.
5. Limit and Define the “Tail” on Commissions: Even if you terminate your listing, most brokers now expect you to pay them commissions for any buyers they introduced you to before the listing expires. I’ve seen these “look-back” periods as long as two years. What’s worse, though, is the language—brokers try to claim every contact or party to a general mailing is “covered” by this look-back. Don’t leave this to chance—limit the time and scope of the broker’s rights to a commission on a sale they don’t close.
6. Termination: Define the circumstances under which both parties can terminate the agreement, including any notice periods and obligations post-termination. A potential red flag is a broker requiring a large termination fee or extended post-agreement commissions for deals closed after the agreement’s expiration, particularly if those buyers were introduced by you or came independently.
I also don’t like companies who use “valuations” or “exit plans” as lead generation for a transaction down the road. These services are very pricey, but the hook is that if you ultimately list your business with one of their affiliated brokers, the valuation cost will be backed out of the later commission. It’s much better and frankly cheaper to get a sale valuation and then choose a broker who is NOT AFFILIATED with the company that did the valuation. Some brokers also do valuations for a nominal fee.
If you are 1-3 years out from a sale, brokers are increasingly offering paid consults, which can help you identify where your business may need some fine tuning before listing. Just remember to spell out any terms carefully in any agreement you sign.
And as always, please don’t forget to call your lawyer if you’re selling a business.
