I meet a lot of owners of businesses who are in the process of selling their business. Often I am asked if owners should pay upfront fees when listing a business for sale.
My response is always that the broker intending to sell the business should have their financial success aligned with the financial success of the seller of a business. Unfortunately, unscrupulous brokerage firms exist in multiple markets which do not align their own success with the success of their clients.
Their business model is as follows:
Tell the customer what he or she wants to hear regarding the price that the business will sell for. Tell the customer that they need a large upfront fee (Often $40K+) and they will get the customer whatever price they want for their business from the buyer. Additional commissions are normally required at the time of the sale.
A more ethical business model is as follows:
Do the research to tell the customer what the most probable sales price of the business will be based on similar businesses sold. Allow the customer to decide if the price that the market will bear is acceptable to them. Charge a low or no upfront fee to go to market and earn a fair commission when the business owner gets paid.
Why this works for the broker, and why it’s bad for the business seller:
Business owners who don’t understand these two different models may go for the large upfront fees because the broker is telling them what they want to hear. It’s a great model for the broker because they’ve been financially rewarded upfront and the customer will turn away other brokers who share what the market will pay. In their model, the risk is limited for the broker. It’s a poor model for the seller because the broker a reduced incentive to invest time and marketing to get the deal consecrated; the broker’s already been paid and he/she knows the business is overpriced and may never sell.
It is a problematic trend for the business brokerage industry that makes all business brokers look bad. To make matters worse, the companies that practice this business model often change their names to avoid litigation and get a fresh reputation when their reputation catches up to them.
How to avoid this dangerous business model:
- Research what an appropriate multiple of earnings or multiple of an annual revenue is for your industry and size of business.
- Ask a broker for comparables of businesses like yours that have sold (not for sale prices).
- Beware of service providers whose financial incentive is not in line with your success.
- Beware of brokers who ask you what you want for your business, or share valuations surprise you in how much you can get.
- Ask to speak with satisfied customers. A reputable outfit will gladly share contact names and phone numbers for happy customers who may worked with before. Be sure to actually call them because it’s not unusual for unreputable firms to provide fake references.
- Ask if they only work with local clients. Part of the duty of seller representation is to be at every buyer seller meeting and to represent sellers. Brokers who are not local may try to represent long distance by phone or email, but there is no substitute for physically being there for client at the meeting. Ask the broker If they plan to be at every meeting, especially if they’re not local.
- Ask about what associations a broker is affiliated with. The IBBA is the largest business brokerage industry association and it requires brokers to agree to a code of ethics which includes not mis-representing misleading information to clients and other guidelines to protect customers. Brokers who agree to these broker standards and invest the time and resources to be a part of organizations like these are more trustworthy.
What is common for fees when listing a business?
Some brokers will list a business at no charge, and it’s common to pay a small upfront fee of a few thousand dollars to list a business, but it’s not common to pay tens of thousands in fees before a broker goes to work to sell a small business (Valued under $1M). This is only common in Merger & Acquisition deals where business are being sold for many millions of dollars.
If you have questions about what a broker client agreement should look like, I’m available to provide my experience and advice at no cost. It’s my passion to empower owners with their options for exit, and I only offer seller representation services to those whom I can actually help.
Note: This article is not intended to comment on market rates; the intention is to warn consumers about unfair trade practices. Consumers are encouraged to research market prices when selecting a broker and assessing appropriate fees to sell a small business.
To your success.
Neal Isaacs, MBA, CBI