Business Broker & M&A Advisor Agreements
You’ve made the call to sell your business. Now what’s next?
After deciding to sell, your first move is to bring in a business broker or M&A advisor. These professionals come with different types of engagement agreements. But which one suits your business sale?
There are three main agreement types to consider:
- Exclusive Agreement: This is the most common. You work solely with one broker or M&A advisor. If the business sells, they get a commission, even if you find your buyer.
- Exclusive Firm Agreement: In this agency agreement, you can sell without a commission if you find your buyer. But you can only have one broker or M&A intermediary actively promoting your business.
- Open Agreement: Here, you can engage multiple brokers or M&A intermediaries, or even sell it yourself without a fee.
In this article, we break down the pros and cons of each agreement type and suggest the best fit for you based on your situation. We’ll also cover other important terms like agreement length, cancellation rights, and fees.
Primary Option: The predominant form is an exclusive agreement.
Under an exclusive agreement, you commit to working exclusively with a single broker for the duration of your contract. Your advisor will receive a commission upon the successful sale of the business, even if you manage to secure your own buyer.
Significance of Broker Evaluation
Conducting a comprehensive assessment of potential intermediaries before finalizing an exclusive agreement is of utmost importance. Evaluate their experience, reputation, and online presence meticulously. Pose inquiries to gauge their familiarity with local and national markets, as well as their overarching marketing strategy.
Rationale for Opting for an Exclusive Agreement
The objective is to secure a representative who wholeheartedly champions your business. Opting for an exclusive agreement is the optimal approach to achieving this goal. By dedicating substantial hours towards the sale of your business, most brokers will naturally seek to be the sole representative of your company.
An exclusive agreement ensures that you, as the business owner looking to sell, gain access to an array of tools, resources, and a network of prospective buyers ready to take action – resources that may otherwise remain beyond your reach. With an exclusive agreement in place, you can find reassurance in the knowledge that a committed professional is actively engaged in the daily effort to sell your business. Moreover, this arrangement offers the added advantage of safeguarding your business’s confidentiality throughout the sale process.
Exclusive Firm Agreement
Exclusive Firm Deal: In an exclusive agency (firm) agreement, you won’t owe a commission if you locate your buyer. Similar to an exclusive agreement, you’re limited to engaging just one broker or M&A intermediary to actively market your business.
The professional you hire can collaborate with other agencies to facilitate the sale, but your interaction must remain solely through your chosen broker or M&A advisor. The broker earns the commission when they successfully secure the buyer.
Open Agreement (Non-Exclusive Agreement)
Embrace Versatility in Partnering
Within an open agreement, business owners have the freedom to enlist multiple brokers or M&A intermediaries, or even handle the sale independently without incurring any fees.
Your Gain if You Secure the Buyer
Under an open agreement, should you successfully secure a buyer for your business independently, no commission will be required. If you decide to engage multiple advisors, the commission is solely attributed to the one responsible for closing the sale.
Considerations About Open Agreements
Although many sellers view open agreements favorably, it’s vital to recognize that they can introduce significant seller challenges. Businesses operating under open agreements may experience prolonged sale periods and potentially fetch lower prices due to the lack of a steadfast commitment. Additionally, a surplus of marketers can elevate the risk of inadvertent breaches of business sale confidentiality.
Other Terms & Conditions to Consider:
Length of Agreement
Agreement Duration: Many brokers and M&A intermediaries typically request a one-year exclusive agreement, though shorter terms can be discussed. On average, the business selling process lasts from six to twelve months, sometimes even longer.
The Conclusion: Irrespective of the agreement’s duration, when the contract concludes, your broker or M&A advisor should furnish you with a roster of potential buyers identified during the agreement period. If you subsequently sell your business to one of these buyers within a specified timeframe after the agreement’s end (known as a “tail”), you will be liable for a fee.
Cancellation of the Agreement
Address contract cancellation rights with the individual or company you enlist. Certain agreements permit cancellation at any point, while others have limitations.
Fees & Compensation
Compensation Methods: Brokers and M&A intermediaries typically receive compensation through three avenues:
- Hourly Rate
- Commission upon sale closure.
Blend: While most fees are commission-based, some employ a blend of these approaches.
Commissions: Payments are made upon closure, with the rate to be discussed and clearly outlined in the agreement. Commissions are usually a percentage of the sale, commonly ranging from 10% to 12%, or sometimes a flat fee.
Small vs. Mid-Sized Businesses: Business owners selling in the range of $100,000 to $1 million generally encounter a higher percentage rate compared to those selling above $1 million. Sales exceeding $1 million often entail a commission of less than 10% of the purchase price.
What truly matters is having a reliable partner. Regardless of your choice between exclusive or open agreements, the success of your business sale hinges on connecting with the ideal buyer. The path to finding the right buyer is smoother with a committed expert actively searching. This is why exclusive agreements prevail as the prevailing choice.