Business brokers and professional intermediaries can bring value when selling your business. Ideally, they can obtain a better sales price as well as provide assistance and support through a long and often complicated process.
However, prior to signing a brokerage contract, it is important to understand what you are getting into. Here are three questions you should ask prior to signing a brokerage contract.
What services is the broker planning to perform?
Do not make assumptions about the services your broker will provide. Business brokers come from a variety of backgrounds and business philosophies. It is important that you question the type of services each will provide. For instance, are they going to help you through the entire process or just find a buyer? Are they committed to providing the following services?
- Understanding your goals
- Providing a valuation
- Exposing the business to the market
- Qualifying the buyer
- Negotiating the letter of intent
- Supporting due diligence
- Assisting your attorney during contracting
- Providing guidance as to closing
- Assisting with post-closing working capital true ups and work out monitoring
Without assistance from your broker, these items will cost you much more in attorney and accounting fees. For these reasons, it is important to agree beforehand what services to expect and to check references to see how well they have been delivered in the past.
What is the length and ability to terminate the proposed brokerage contract?
Many brokerage contracts require a two-year exclusive contract with no cancellation provisions. The assumption is that the broker will continue to make a substantial investment of time and resources to market and shepherd your deal through closing. If you are not comfortable that a steady stream of buyers will be engaged, a two-year exclusive contract may not be appropriate.
We have heard stories that this can feel like being held hostage when a broker is not actively pursuing your solution or providing qualified buyers. To avoid these pitfalls, be sure that you understand the term of your brokerage contract.
What would your attorney say about the brokerage contract?
Brokerage contracts are long and complex documents. Many of these provisions are important to protect you while some are there to protect the broker. Often there are provisions that may be overreaching on the broker’s side of this equation.
To put this in context, this document puts in motion what is perhaps the most significant transaction of your life. Clearly, this is not the place to try to save money on attorney fees. Therefore, it is important that you have an attorney review this critical document.
In fairness to both you and the broker, the reviewing attorney should have some expertise with intermediary contracts.
Take the Next Step with Molliter Advisory
Molliter Advisory, LLC, is a boutique M&A firm that works with small-to-medium sized companies to value, market, negotiate and bring to close sales and purchases of businesses for their clients. Their deal sizes range from $500,000 to $20 million sales prices. Learn more about our business brokerage services.