Business Brokers: How We Get Paid Pt. 2
Last week’s post – about how business brokers get paid – covered a fair amount of ground. But because there are probably an infinite number of ways to structure deals, there are probably just as many ways to structure how we get paid.
What I attempted to illustrate in that post was that there are quite a few ways professional business brokers get paid and to discuss a few of the general categories. But because I try to keep these posts at a manageable length – missives that readers can get through in five minutes or less – I could neither dive into each category in great detail nor even cover all the topics I wanted to.
And so at the end of that post, I stated that there were two additional important categories to be discussed and this post tackles them. But since then, I received an email with a question about negotiating our commission or success fee in the middle of a deal.
So, this post includes a discussion of three “How We Get Paid” topics rather than two. Let’s get started.
I’m often asked about whether or not we require upfront retainers to be paid by clients. The answer is “sometimes”.
Whether we request a retainer generally depends on several factors, including
- The size of the deal
- The type of business
- The target price established with the seller
- The size/type of the projected buyers
- The level of specialized marketing that the business will require.
In short, the larger the deal, the more likely we’ll ask for a retainer.
Retainers are virtually unheard of in the Main Street Market but they are increasingly seen in the Middle Market. The owners of larger businesses understand that there will likely be some significant costs incurred by the broker/intermediary if the business is to marketed professionally and successfully.
And from their experience hiring other professionals – such as their accounting firm or legal advisor – such owners are also likely to understand that professional business brokers cannot front all the costs – both in terms of the time our staff will spend on the project and the marketing platforms used to drive potential buyers.
We generally lay our costs out and, again depending on the size of the business and the target price established with the seller, we’ll request that all or some of our costs be covered with a retainer.
A retainer can be a single up-front sum or a series of periodic payments. We prefer a monthly arrangement and the assignment is capped at a certain number of months with the opportunity to extend, should both parties agree.
You can expect push back from owners of smaller business – those with transaction values of less that $2 million, for example. Such owners, after all, often equate business brokers with realtors and unless you’re a realtor marketing a 2,500 acre ranch in Montana for Ted Turner, it is unlikely that you’ve ever heard the word “retainer”.
Additionally, we want the business owners to be invested in the sale of their business. We’re going to be doing a significant amount of work to get their business sold and they need to know that. If someone comes to us wanting our help in selling their $15 million business and they are unwilling to invest a healthy retainer to cover our costs – or a good percentage of those costs – for a six-month or longer period, we’re unlikely to take them on. We want them invested in the sale of their business.
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Some brokers are willing to apply some or all of the retainer to the commission or success fee that they expect to receive at closing and there are any number of reasons to do that. Other brokers might reduce their standard fee in exchange for the seller covering the upfront costs.
There are any number of ways to work this out but the bottom line is that, in the case of larger or complex businesses, we often require a retainer from the seller.
Negotiating the Commission
This is always a problematic topic and it comes up often during our weekly Friday Afternoon Wrap Ups (our “FAWU”s) with brokers in our network and individuals that have taken or are taking our course. Should business brokers agree to negotiate their commissions or success fees mid-stream?
Well, like the retainer question, it depends.
If you’ve been working on the sale of a business for a year and there’s an offer on the table that is close to what the seller will accept, it’s certainly reasonable offer to help close the gap. But if you brought a business to market 30 days ago, have gotten plenty of traffic, multiple inquiries and an offer that is close to what the seller will accept, I’d advise thinking long and hard about reducing your fee; unless the seller comes to you and requests it.
The old adage that “a bird in the hand is worth two in the bush” applies to our business as to most others. If you’ve budgeted 10 to 12 months to find a buyer and close – and were expecting a $150,000 check at closing based on a 10% fee agreement – it would certainly be reasonable to agree to the seller’s request to lower the fee if the seller will accept an offer that comes in within 30 days of bringing that business to market.
Why? Let’s do the math.
If the offer includes a 60-day due diligence period and then 30 days to close, you’ll receive your fee in five months rather than 12. One hundred-fifty thousand dollars over 12 months equates to $12,500/mo. Lowering your fee from 10% to, say, 7% equates to $21,000/mo for the five months from listing to closing.
You can see why we might do this occasionally.
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One important point to remember, though, is this.
There is generally no reason to reduce your fee if you find a buyer that is offering full price and the terms of the contract contain no likelihood of significant additional expenses for your client. And your listing agreement couldn’t be clearer: “We promise to do our best to sell your business for $1.5 million and, if we do so, you promise to pay us 10%”.
If you get a full price offer, you’ve performed exactly as stipulated in the listing agreement. It’s now time for your client to perform likewise.
When we get a full price sale, we’ve occasionally had clients complain (albeit weakly) that we didn’t have to work very hard to get our fee – essentially saying that we’re “too good” at what we do – and that they feel we should reduce our fee. When that happens, we remind them of a couple of things:
- We accomplished the task they hired us to accomplish
- We were able to get them exactly what they wanted.
- We’ve been doing this for X number of years, have spent thousands of dollars and hundreds of hours training and have built up a database of buyers over that period of time. Like their attorneys and accountants, our clients pay us for our expertise.
Who Pays Us?
This one is very important.
You can have all the documentation in the world describing your relationship with the seller, particularly with regard to your fee, but it could all come to naught if your client turns out to be less than honorable. This is why it’s extremely important to get your fee, not from the seller but from the attorney or settlement company that handles the closing of the transaction.
The vast majority of clients we serve and that any business broker will encounter are honest and honorable. But we’ve come across one or two doozies! Avoidance of a sticky situation – one that puts some or all of your fee in danger – is not only the best approach but also the easiest.
We always include – “add”, if we have to – a clause in any acquisition agreement that refers to the listing agreement we have with our client, thereby making that listing agreement and our brokerage firm a part of and parties to the acquisition agreement. The clause specifies the amount that we’ve earned, how such amount will be paid and by whom.
If the deal closes “all cash” or if there is an amount that will remain in escrow pending some act (see last week’s post), we want to be paid by the attorney or closing/settlement company that is handling the formal closing of the transaction. That’s who cuts the checks and we want ours cut at the same time our client’s is.
If the deal includes our client holding a note for some amount of the purchase price, we try to get the buyer to write two payments – one to our client and one to us.
The two-check approach can be a little dicey, however, so the solution is to have the buyer set up automatic payments to the seller – and the seller set up automatic payments to us. That way the seller doesn’t start to wonder, over time, why he or she is still writing checks to us.
The Bottom Line
As I stated early on, there is almost an infinite number of ways to structure deals and, as such, there is almost an equally infinite number of ways to structure the payment of our fees.
The important point is that business brokers have to remember that our fee must be an integral part of our planning as any deal is shaping up. Don’t forget: we’ve earned it!
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.