By Scott Bushkie
When it comes to up front fees for selling your business, never opt for the extreme. Too high, and the firm has less incentive to actually sell your business. No fee at all, consider that most often you get what you pay for.
As a business broker, I worked with one small business owner from Michigan who ran a modest office supply business. After reviewing both his company and the market, I estimated the business would bring $1 million to $1.5 million.
He talked with a large, national M&A firm that convinced him his business could sell for $11-12 million. Quite a difference.
The kicker was that the national firm wanted $45,000 up front to market the company. Looking at what seemed like a large potential return, the owner went for it and scraped together the fee.
In exchange, they delivered a formal valuation (again an unrealistic one, in my opinion), and put together a marketing booklet. From there, as is often the case, it seemed little else happened.
At the same time, this national M&A firm was engaged in a class action lawsuit (later settled for $45 million) for defrauding small businesses.
Fortunately, I talked to the firm and succeeded in getting the client his money back. But many business owners aren’t so lucky.
I’m certainly not against up front fees. We charge them ourselves, to cover hard costs and ensure the seller has some sense of commitment to the process. But fees need to be reasonable.
How much is too much? That’s hard to say. Look at the dollar figure they’re asking for, compared to the services they’ve committed to deliver. Does it look like you’ll be getting value?
We use a team of specialists, often an M&A attorney, tax accountant, financial advisor, business psychologist and valuation specialist. We know it’s important to spend a few dollars up front to reap rewards at closing.
Like the time our tax specialist saved the client $500,000 his corporate accountant didn’t find. Or the husband and wife who had their first serious talk about what they would do in retirement.
Consider whether the fee is so high it weakens the incentive to actually sell your business. Imagine the potential revenues this national company was realizing. It was estimated they engaged 2,000 clients nationally a year, meaning they earned $90 million—in up front fees alone.
But beware of firms who don’t charge anything at all. These brokers play a numbers game, taking on too many clients in hopes something will sell, statistically less than 25% of them do. They don’t have the energy or resources to address all the issues we consider, including your final compensation and payment goals.
An intermediary should make most of their money on the successful sale of a business. But they should also care about your tax situation and other personal objectives. That costs a few dollars up front, but generally saves thousands in the end.
Scott Bushkie is President of Cornerstone Business Services, a low-to-middle-market M&A firm. Reach him at 888-608-9138 or firstname.lastname@example.org