How to Sell Your Business, page 20

Fee Structures, continued

It’s important that you know what the Lehman formula is, because it is widely used by intermediaries in the mergers and acquisitions business, and is considered normative for smaller businesses. But any number of variations is possible. A flat fee of between 1% and 2% is a reasonable way to go in many small business situations.

Exclusivity

You should consider the exclusivity and duration of a contract with a broker. If you sign an exclusive deal, you will end up paying a fee even if you sell the business to your brother. You may wish to exclude certain buyers, or kinds of buyers, from the contract.

Who Is Represented?

Who pays the broker? Just as with real estate transactions, there can be brokers paid by the buyer and brokers paid by the seller. If there are both, in practice the fees may be split between the intermediaries (it’s very rare to see a deal scuttled over fees paid to brokers).

In practice, there’s less here than meets the eye. In essence, all fees will come out of the proceeds of the sale at closing, which means they come out of you pocket as seller, even if they are nominally paid by the buyer. A more interesting question is which party the broker represents.

A broker hired by a buyer represents the buyer, and has no fiduciary duty to you the seller. The job of this kind of broker is essentially prospecting—locating possible sellers that might the buyer’s criteria.

On the other hand, a broker that you’ve retained nominally represents you—and cannot also represent buyers of your business. The problem with this theory is that as a matter of practice, brokers, whose job is to round up buyers for you, spend a great deal more time with these buyers than with you. It’s also likely that if a broker has their hands on a qualified buyer who is not enthusiastic about your business that the broker will try to steer them to some other business that is for sale. So the real loyalty of brokers is often to the buyer, even if they are supposedly representing you.

In fact, an intermediary primarily wants to see a sale finalized—so the success fee can be collected. He is not likely to be very concerned with maximizing the sales price, or the niceties of contractual terms such as earn outs and holdbacks (very important to you).

Recognize this situation for what it is, and do not let a broker take control of negotiations past the introduction stage. In addition, you can try to neutralize the greater contact the broker has with buyers by spending some time with and getting to know your broker.

Continued next page

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