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Discussions > Are Upfront Fees, Retainers To Brokers Common?
Are Upfront Fees, Retainers To Brokers Common?
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Comments & Replies: 8 Views: 5225
Posted By: Peter Siegel MBA 
Topics: Business Brokerage, Legal Issues, Selling A Business Tags: business brokers, legal issues, selling a business
Topics: Business Brokerage, Legal Issues, Selling A Business Tags: business brokers, legal issues, selling a business
A business owner and I were just chatting and he told me he was going to be listing his business with a local business broker, but the broker had asked for a "upfront fee" or "retainer" to get started.
My response was to this topic is:
The practice of a business broker charging an upfront fee to list a business for sale is not unheard of. But it is not commonly done. In most cases, there are plenty of competent business intermediaries willing to represent a seller without asking for any money before a sale is made and completed. This is part of the most common understanding that the only way any money is earned by the professional is with the commission paid upon successful conclusion of a transaction. An exception might be in the case where there will be extraordinary expenses incurred by the broker, such as getting a professional appraisal of value, or receiving a few hundred dollars that will be spent on professional creation of a business selling package. In that event, incidentally, the presentation should belong to the seller as he or she has paid for it, and would have use of it if the broker’s listing expires with no sale accomplished.
It’s usually recommended that sellers decline to enter into a listing agreement that requires them to make any payments to the broker or agent before a buyer is found, a transaction is achieved and a deal has been finalized.
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Are upfront fees or retainers common? What is your experience with upfront fees and retainers? What should this business owner/seller watch out for? What are the typical fees asked for and what are these fees typically utilized for? What should the owners expectations be moving forward if they do engage this broker?
Thanks for your comments and replies on this topic above.
My response was to this topic is:
The practice of a business broker charging an upfront fee to list a business for sale is not unheard of. But it is not commonly done. In most cases, there are plenty of competent business intermediaries willing to represent a seller without asking for any money before a sale is made and completed. This is part of the most common understanding that the only way any money is earned by the professional is with the commission paid upon successful conclusion of a transaction. An exception might be in the case where there will be extraordinary expenses incurred by the broker, such as getting a professional appraisal of value, or receiving a few hundred dollars that will be spent on professional creation of a business selling package. In that event, incidentally, the presentation should belong to the seller as he or she has paid for it, and would have use of it if the broker’s listing expires with no sale accomplished.
It’s usually recommended that sellers decline to enter into a listing agreement that requires them to make any payments to the broker or agent before a buyer is found, a transaction is achieved and a deal has been finalized.
-------------------------------------------
Are upfront fees or retainers common? What is your experience with upfront fees and retainers? What should this business owner/seller watch out for? What are the typical fees asked for and what are these fees typically utilized for? What should the owners expectations be moving forward if they do engage this broker?
Thanks for your comments and replies on this topic above.
Each business transaction is different than the next. In certain cases the broker might see that the listing is reasonably priced, the business is relatively easy to understand and is immediately marketable. In these cases a fee may not be warranted. However, the broker might still charge for certain items, such as advertising, packaging, information gathering and research. I do believe that a fee is absolutely warranted with businesses that do require a great deal of education and packaging. Proper preparation is often very time consuming. In some cases Sellers are slow with providing information or the broker might need to seek out other sources of information, which can also take a great deal of time and expense. Not having certain information available might also prevent the business from being immediately marketed.
A broker needs to focus on putting buyers and sellers together. The time taken away from this primary function is both detrimental to the transaction being prepared but also for the other listings the broker is working on; and essentially the brokers income. These fees might also be used to pay an outside source to assist with the preparation. It is also in the Sellers best interest to show his business in its greatest light and to have a good understanding of the value of the business being offered. Most sellers do not know the value of their business or where the value comes from. They rely on the broker to guide them. To get the Buyer his/her best price, the broker needs to identify both the current position of the business and be able to point out the up-sides of the business. This will take research. The broker needs this information to have confidence in the listing and its salability.
This preparation discussion is an important part of this fee discussion as a whole. Most brokers have lost transactions due to incorrect, incomplete or inadequate information discovered during diligence. These errors that arise can be minimized with more time spent up front in preparation. In doing this the broker might also gain a greater understanding of the value of the business being listed. This could result in a higher or lower selling price, but most importantly it should result in a higher percentage of successful closings. That is certainly beneficial to the broker but even more so for the Seller.
Lastly, If the broker is able to complete the transaction it could be an option to credit back all or a portion of these fees. This would be a choice the broker should make.
A broker needs to focus on putting buyers and sellers together. The time taken away from this primary function is both detrimental to the transaction being prepared but also for the other listings the broker is working on; and essentially the brokers income. These fees might also be used to pay an outside source to assist with the preparation. It is also in the Sellers best interest to show his business in its greatest light and to have a good understanding of the value of the business being offered. Most sellers do not know the value of their business or where the value comes from. They rely on the broker to guide them. To get the Buyer his/her best price, the broker needs to identify both the current position of the business and be able to point out the up-sides of the business. This will take research. The broker needs this information to have confidence in the listing and its salability.
This preparation discussion is an important part of this fee discussion as a whole. Most brokers have lost transactions due to incorrect, incomplete or inadequate information discovered during diligence. These errors that arise can be minimized with more time spent up front in preparation. In doing this the broker might also gain a greater understanding of the value of the business being listed. This could result in a higher or lower selling price, but most importantly it should result in a higher percentage of successful closings. That is certainly beneficial to the broker but even more so for the Seller.
Lastly, If the broker is able to complete the transaction it could be an option to credit back all or a portion of these fees. This would be a choice the broker should make.
Contributor: Business Broker, SF Bay Area
Upfront fees or retainers are very common for larger size deals, e.g. where the price tag would be over a million (without real estate), but not as common for deals that are smaller.
These fees generally tend to be for a specific purpose of doing a valuation or for preparing a pitchbook (also known as a confidential business profile for smaller deals) or both. When broker has delivered these items then the upfront fee has been earned. Most listing agreements are structured such that broker only earns a fee (or commission) when a deal actually takes place (with a few exceptions) and Broker has to do a lot of work to prepare the business material for soliciting prospective buyers, it is not unreasonable to get some upfront money for these two specific tasks.
It may actually make sense to have the valuation done (and paid for) ahead of signing the listing agreement. This way you would have a better idea of what the asking price should be. As a business owner when you sign the listing agreement you give that broker the exclusive right to sell the business for a specified length of time. If the business doesn’t sell then you haven’t actually spent any money on it. But when you pay upfront fees and the business doesn’t sell then you are out that amount.
So before signing an agreement with upfront fees, you need to be quite confident in that broker’s ability to actually get the business sold. If you are confident then there shouldn’t be a big concern about paying the fees. Valuations for smaller businesses costs around $2,500 and for much larger businesses can go as high as $10-$15,000.
The total retainer for larger size deals ($10M or more) could be in the range of $25,000 to $50,000. From the broker’s perspective receiving an upfront retainer from Seller gives them confidence that Seller is actually quite serious about selling the business and not just testing the water.
These fees generally tend to be for a specific purpose of doing a valuation or for preparing a pitchbook (also known as a confidential business profile for smaller deals) or both. When broker has delivered these items then the upfront fee has been earned. Most listing agreements are structured such that broker only earns a fee (or commission) when a deal actually takes place (with a few exceptions) and Broker has to do a lot of work to prepare the business material for soliciting prospective buyers, it is not unreasonable to get some upfront money for these two specific tasks.
It may actually make sense to have the valuation done (and paid for) ahead of signing the listing agreement. This way you would have a better idea of what the asking price should be. As a business owner when you sign the listing agreement you give that broker the exclusive right to sell the business for a specified length of time. If the business doesn’t sell then you haven’t actually spent any money on it. But when you pay upfront fees and the business doesn’t sell then you are out that amount.
So before signing an agreement with upfront fees, you need to be quite confident in that broker’s ability to actually get the business sold. If you are confident then there shouldn’t be a big concern about paying the fees. Valuations for smaller businesses costs around $2,500 and for much larger businesses can go as high as $10-$15,000.
The total retainer for larger size deals ($10M or more) could be in the range of $25,000 to $50,000. From the broker’s perspective receiving an upfront retainer from Seller gives them confidence that Seller is actually quite serious about selling the business and not just testing the water.
I do not charge a retainer or upfront fee to list a restaurant for sale. I think it is not a common practice to charge upfront fees- at least not for the sale of restaurants. My commission is paid by the seller at the time of the close of escrow. However, there are circumstances that can cause a commission to become due before close of escrow such as withdrawing the listing prior to the expiration date but I do not charge upfront fees.
The only time I charge an upfront fee or a retainer is for expert witness testimony or to perform an appraisal that is not for the purpose of obtaining a listing.
The only time I charge an upfront fee or a retainer is for expert witness testimony or to perform an appraisal that is not for the purpose of obtaining a listing.
Contributor: Timothy Cunha JD: Business Broker, SF Bay Area
Owners have a new resource for selling their very small business (typically, sales under $500,000) that can provide the business seller "the best of both worlds." Business sellers benefit from the professional assistance of a broker in valuing the business, re-casting financials, writing effective but confidential ad copy, receiving initial inquiries, getting NDAs and buyer profiles submitted, and then drafting the offer and contract, arranging for escrow, and facilitating due diligence.
However, for such small business sales, the meeting between the buyer and seller, the showing of the business, and the negotiation of price and terms can usually be handled by the business seller without the broker being present Particularly when it's a business selling for $200,000 or less. It always bothered me that the typical business brokering contract provides for a $15,000 minimum commission no matter how low the sale price. That's a lot for a seller to spend on a $40-, $60-, $100,000 sale.
To meet this market, we've introduced a "broker-assist" program. The seller of a business can pay a reasonable monthly fixed-fee commission to get all the preliminary work set up, cover the broker's advertising and response costs, and get periodic consulting-by-phone, and pay no additional commission on sale. In this context, "upfront fees" make sense, because sellers are getting real, quantifiable value, and dramatically reducing their cost of selling. For example, a business selling for $60,000, after three months of advertising, would typically pay the broker $15,000, or 25%; with our program, their cost would be approximately $1,500 to $2,500, depending on the program they choose.
However, for such small business sales, the meeting between the buyer and seller, the showing of the business, and the negotiation of price and terms can usually be handled by the business seller without the broker being present Particularly when it's a business selling for $200,000 or less. It always bothered me that the typical business brokering contract provides for a $15,000 minimum commission no matter how low the sale price. That's a lot for a seller to spend on a $40-, $60-, $100,000 sale.
To meet this market, we've introduced a "broker-assist" program. The seller of a business can pay a reasonable monthly fixed-fee commission to get all the preliminary work set up, cover the broker's advertising and response costs, and get periodic consulting-by-phone, and pay no additional commission on sale. In this context, "upfront fees" make sense, because sellers are getting real, quantifiable value, and dramatically reducing their cost of selling. For example, a business selling for $60,000, after three months of advertising, would typically pay the broker $15,000, or 25%; with our program, their cost would be approximately $1,500 to $2,500, depending on the program they choose.
Contributor: Business Appraisals, Valuations Advisor
It was never acceptable for me to ask for a retainer from either a seller or buyer when I was a Business Broker in California. Getting an exclusive listing from an owner of a salable business was the reward in its self. I think I would have lost the chance of getting many good listings if I had asked for a retainer. I believe the sellers wanted me to be invested in the selling process of their business. There was one larger firm in California, whose name I will not mentioned, that did ask for substantial retainers but I know they sold very few of their listings and they made more money on the retainer fees that on selling commissions.
I personally do not charge upfront fees. I receive payment when the deal is closed. I feel if a broker charges upfront fees, to sell a restaurant for example, then the incentive for that broker to perform has been diminished. I explain to the seller how I advertise and work with buyers to sell the business, and that how my hard work justifies my commission.
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Mark Chatow, Esq.: Legal Services For Buying, Selling Businesses Mark has a broad range of small business purchase & sale experience from analyzing potential acquisition targets to successfully guiding buyers and sellers through the purchase & sale of small businesses. Mark can assist with contracts, negotiations, legal matters, etc. Reach Mark at 949-478-8393. |
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Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063. |
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Elizabeth McGovern: Escrow Services - SF Bay Area McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645. |
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