Should I pay an upfront fee for selling my business?
You have worked long and hard to build up your business and now you are thinking of retiring. The question is how should you go about selling your business and what types of fees can you expect to pay? Some Mergers & Acquisitions firms and Business Brokers charge an upfront fee and/or a retainer fee and some only charge a fee when a business is sold. There are different theories on the advantages of each type of fee structure. What is the best type of business broker or M&A firm? How do we approach the fees associated with business brokerage?
From the point of view of the firm selling your business, an advisor would prefer to have an upfront fee. This signals that you are serious about selling your business, and it helps them to pay for marketing costs and the time invested in selling your business.
But as a business owner do you want to invest in paying a fee to a firm that requires an upfront fee to justify investing time and money into marketing your business. A brokerage firm with a consistent track record of selling businesses with a commission paid at the closing should be able to cover the costs of their marketing and time invested to sell a business.
Furthermore, if Brokers are only paid a commission when a business is sold then they are more likely to only take on assignments when they feel confident that they can sell your business. If you are being asked to pay an upfront fee than you don’t know if the advisors are more interested in taking the assignment to get the upfront fee or whether they feel confident that they can sell your business. Upfront fees can vary from $5,000 to $50,000 or more so this can be a large incentive for someone to take on a new assignment even if they aren’t sure if they can sell it.
If you are only paying a fee when a business is sold then your goals of selling your business would be aligned with the Business Broker or M&A firm’s goals of getting paid when the business is sold. The interesting part is that upfront fees are more often charge by firms handling the sale of larger businesses. It would seem that larger potential commissions would justify an investment in time and advertising dollars to get a larger commission. But just the opposite seems to be true: Business Brokerage firms that handle smaller deals do not charge an upfront fee and M&A firms that handle larger deals charge an upfront fee.
Business Brokerage firm or M&A firm
Business Brokerage firms typically handle deals that are less than $1Million and most don’t charge upfront fees. M&A firms handle deals that are often $5Million to $1Billion or more. In the middle are firms that handle deals of $700,000 to $20Million. In this middle range, there are Business Brokerage firms and also M&A firms. M&A firms typically charge upfront fees and Business Brokerage firms typically do not charge upfront fees.
So what is the difference between an M&A firm and a Business Brokerage firm? Often there really isn’t much difference except that a firm can call themselves either an M&A firm or a Business Brokerage firm depending on their preference. Both firms will meet with the owner and gather information about your business. This will include information on your employees, customers, financial information and the unique benefits and challenges of your business. Then they will give you a recommendation on a potential selling price.
If you agree to hire them the M&A firm will typically require an upfront fee and a commission if the business is sold. The Business Brokerage firm will just require a fee if the business gets sold. Typical commissions for selling a business are 10% of the sale price for businesses priced at $1Million or less. For Businesses priced over this amount, there’s often a sliding scale for a lower percentage for larger deals.
After choosing a firm to represent you, the next part of the process is to develop a document that will be used to market your business. This is usually a document that provides enough information to get people interested in your business but not enough information so that potential buyers can guess what business is for sale. This document is usually a page or so. Maintaining confidentially is important because business owners typically don’t want their employees, customers, and competitors to know that their business is for sale. Both M&A firms and Business Brokers will work in such a way as to protect confidentiality.
Then a second document will be developed which is provided to potential buyers after they sign a confidentiality agreement. This document is more detailed in scope. Business Brokerage firms typically develop a document that is a couple of pages or more and provides an overview of the business and answers to common questions about the business. This is also provided with financial information about the business. M&A firms often develop a document which can be 40 to 60 pages. These documents are often called Books. And the justification of some M&A firms is that it costs a lot of money to develop books.
However many sellers will remark that I’m not selling a book, I’m selling a business, and most buyers are usually too busy to read 60 pages. Many of these pages are boilerplate pages that are copied and pasted about a particular industry that the business is in and things of this nature which can be found on the internet.
Marketing the Business
How do M&A firms differ from Business Brokerage firms in marketing the firm to potential buyers?
M&A firms will usually develop a list of potential buyers that are in the same or similar industry as well as private equity investment groups. Then they will send the short 1-2 page overview document (sometimes called a teaser) to this list of potential buyers. They will also send the overview document to a list of potential buyers that they have built up over the years.
Business Brokers will usually advertise the overview confidential document on the internet and will have potential buyers contact them from the ads. These potential buyers will typically be from three different types of buyers: 1. Individual buyers. 2. Private Equity investors. 3. Company owners that are in the same or similar business and looking to expand.
So both M&A firms and Business Brokerage firms will tend to get the same type of buyers but will go about in somewhat different ways. Our recommendation would be to hire a Business Brokerage or M&A firm that will use all three methods of getting potential buyers. 1. Proactively assembling a list of potential buyers that will be contacted. 2. Advertising the overview document on the internet and 3. Contacting potential buyers that are already in the Broker or M&A firm’s database.
Qualifying the Buyers
Both Business Brokerage firms and M&A firms should qualify potential buyers prior to releasing confidential information. The qualifications should include the buyer’s financial capabilities as well as who the potential buyer is. The buyer may have the money but they may not have the background or interest to run the particular business they are considering.
On the other hand, the buyer might have the perfect background and interest but if he doesn’t have the financial qualifications than of course, you don’t waste time with someone unqualified. Then there are the buyers that are in the middle where they might qualify to purchase a business or they might not.
You want a Broker or Advisor that has contacts with Banks to determine whether a specific buyer can qualify for a loan to purchase a business. An experienced banker can analyze a person’s credit as well as the financial information of a business to determine whether someone will qualify.
After getting qualified buyers that are interested, the next step is to answer any questions and then solicit offers. Multiple offers give you the most leverage to negotiate the best deal. Once an offer is agreed to then further due diligence is done and a purchase and sale agreement is signed and the deal is closed.
Synergy Business Brokers provides the level service of an M&A firm without the upfront fee. You can read more at: What are the differences between M&A firms and Business Brokers. We feel that having a fee based only our performance aligns our goals with the goals of our clients. And while no firm can guarantee that they will sell all of their client’s businesses, the fact that we don’t charge an upfront fee allows us to focus on only handling clients that we think we can help to achieve their goals. You can hear from our customers at Testimonials & Reviews and our Corporate Video.
We sell businesses with annual revenues of $600,000 to $40Million in NY, NJ, CT, MA, PA, MD, TX, NH, LA, OH, VA, DC, and throughout the US. We have experience selling businesses in manufacturing, Software, distribution, construction, healthcare, services, contractors, technology, engineering, HVAC, Landscaping, Consulting, Importers, and Education.