“Should I Pay Fees To Brokers or Sale Advisors?”
This is a question which we face on a daily basis here at Firm Gains. Business owners don’t want to spend money that they don’t have to, so it’s an understandable position to take.
There are no hard and fast rules to answering, at best it could be summed up by ‘it depends’. However, we have been in the industry for long enough to share what we have found from our experiences of successful business transactions.
“Why should I pay to sell my business anyway?” For some people, selling a business yourself is definitely the best option. There are two types of businesses for whom this works well: One person businesses or micro businesses: These businesses tend to be more retail-based, such as: cafes, restaurants, pubs, B&B’s, fish and chip shops. They have low barriers to entry for potential purchasers and so are perfect for self-selling. This commonly means selling locally, often to local property investors, through commercial property agents or even listing on one of the large business selling websites.. We maintain that instructing someone to help with valuations or sale documentation is worth every penny, and if you need this assistance, we can help Businesses who already have several interested parties in buying their business: whilst it may not make sense to pay fees in this situation, we would still suggest getting help professional assistance when it comes to ‘getting over the line’. This is all dependent on how good the offers are of course, as the more offers that are on the table, the higher the eventual sale price.
For those who don’t fall into these categories though, hiring a broker or sale advisor will, in virtually all circumstances, increases the chance of selling and improve the price that you are likely to sell it for.
The Hidden ‘Cost’ is Your Time! When it comes to selling your company, there is one big factor that is rarely considered, and that is the value of time. Business owners are extremely time poor, and in the rare free moments they get they have their company and decisions they need to make at the back of their head. Imagine then adding selling your business on top of that. It is estimated that selling your business yourself over a 6 month period will take an additional 200 to 300 hours of dedicated work. Do you have that extra time to spare? Hiring a broker or a sale advisor cuts that time spend dramatically, and instead it will take between 20 and 40 hours over a 6 month period, that is much more manageable and leaves you to keep your head down on improving your business performance So, even if there were no material gain in using a broker, for business owners the time overhead should not be underestimated. Worse, if you do manage your own sale, there is a danger that you will take your eye off your enterprise, which can reduce business performance just at the time when you should be reporting your best numbers. “So I want to hire a broker, but they should only get paid if I sell, like estate agents do”
A ‘no win, no fee’ culture has seeped into many business areas, it is the preferred route for many. Yet there are some problems we have seen with such an approach.
Firstly, there seems to be a premise that paying for a sale advisor’s services upfront is just money lost and that it does not affect the outcome. In our experience, this is not borne out in practice.
The comparison with the property market is not necessarily a fair one.
Consider these issues:
Brokers who ask for fees put much greater resources into the search and negotiation, thereby giving a greater chance of sale, as well as securing a better sale price. They have dedicated researchers, analysts, deal leaders and legal advisors all of whom bring their expertise to the sale process. Most businesses have a much broader range of potential sale price than property deals. Properties almost always sell within 10% of the sale price they are marketed at, whereas businesses, depending on appetite, buyer interest, sector and desirability can have a range of +/- 50%. Find the right buyer, and they will pay a premium. Additionally, most properties listed for sale are sold, most businesses listed for sale are not. So, whist paying fees upfront is no guarantee from all the transactions we have been party to, the business owner is almost always returned a greater value in the outcome than just going with a ‘no win, no fee’ approach. “Surely if I’m only paying my broker on completion, then that will give them more incentive to sell my business?” In some cases this may be true, however in our experience the desire to sell your business is the same no matter who you go with as there is financial incentive in both situations.
Worse, if you do end up with a broker who is putting no active effort in trying to sell your business, you may end up regretting the time lost with no apparent result as, even without financial commitment, there’s almost always a contract in place.
In all cases, we believe you should go with those that offer you the greatest chance of selling your business, and for the best possible price. Which is our modus operandi: to help business owners choose the right exit strategy for their company based on their specific situation. By matching your trading, sector, location and situation you can then find the best match and the best exit. It pays to start with the end in mind. Whilst fees are often beneficial, it is not true that every sale advisor you pay upfront fees to will lead to a better result. Unfortunately, there are some brokers within the industry that will overvalue your business and even tell you that they already have buyers lined up for your company. Many charge high upfront fees for the privilege of selling. However, once signed up, you find that these opportunities don’t materialise and the end result is frustration. So, you certainly need a steady hand on the wheel to get the desired result, but focus away from fees and concentrate on the end product. “Surely any money saved in broker fees is extra money in the bank?” Again this is an area we work closely with sellers on, as it comes down to the numbers: over the years we have experienced that the financial rewards of paying a broker are significant. So let’s compare the two options: fee or no fee Let’s look at an example of a normal sized SME who wants to sell, they have the follow financials:
Turnover £2.0m Adjusted Operating Profit £400k Net Asset Value £300k Valuation range £1m – £1.5m For this kind of business, in most circumstances they would benefit from hiring a sale advisor or broker to take on the sale process for the reasons detailed below Option A: Broker with £20,000 upfront fees, 4% sale success fee A broker of this type will start by producing all your business documentation, marketing material, and the information memorandum ready to take to market. The financials come next. A member of the team will go through your accounts with a fine tooth comb, this is so that an adjusted EBITDA (or Adjusted Net Profit) figure can be found, and to also iron out any causes for concern before the negotiation stage takes place. The next stage would be research, searching the market for potential acquirers who are either actively looking or not. These opportunities could come from competitors within the industry, businesses from complementary sectors, private equity, and many more. After this you’re live in the market, potential acquirers will be contacted and after sending out information under protection of an NDA (non-disclosure agreement), declarations of interest will be made and the next stage of the process begins, negotiation. This is another area in which the broker really becomes worth their salt, by pushing up your sale price towards that upper valuation range. Their experience in negotiation will be invaluable when discussing the value of goodwill, assets, earn-out’s, succession plans, and overall price. The final stage takes place upon receipt of an offer which is acceptable, due diligence. This is where the a legal team will come on board and begin to scrutinise every detail of your business to verify all the promises and claims that have been made, this is exactly the purpose of those early conversations and investigations of your finances, to make this final stage as smooth as possible. Assuming that due diligence went through without a major hitch, then the offer will go ahead as agreed in the terms, and you can buy that house you’ve always wanted, or take that dream holiday, it’s really up to you. You’ve earned it. Option B: Broker paid on completion, 4% sale success fee Brokers of this type tend to have a smaller team and so offer a slimmed down approach. Documents and information memorandums will still be prepared and financials will be looked over, but the main differences appear when it comes down to research and marketing. Because of smaller resource, not as much time is taken over the research aspect and a major part of the marketing will be done on listing websites, such as Businesses for Sale, Daltons Weekly etc. If a buyer comes forward and puts an offer down on the table then some of these brokers will come to the meetings with you to offer support and handle negotiations, but many will not. Here we have laid out the potential outcomes using each of the above broker solutions. There is more risk up front, but as you can see, the financial benefits come to fruition on sale of your business.
A: Broker (paying upfront) B: Broker (paid on completion) Sale Success Potential 40% 30% Your Time Investment 40 hours 80 hours Cost of Sale £20,000 +4% =£80,000 4% =£40,000 Factored Financial Risk £12,000 £0 Projected Final Income £1,500,000 -£80,000 =£1,420,000 £1,000,000 -£40,000 =£960,000 Sale Success Potential: In our experience you have a greater chance of selling with a broker who has more resource behind them, we have estimated this to be a 10% increase in chance. Your Time Investment: Whilst both of these are significantly lower than going it alone. We have estimated that significantly more time will be spent with option B, this is due to the fact that many brokers won’t attend meetings with you. Cost of Sale: £20,000 for option A is just above the average that we encounter when it comes to broker fees, however we wanted to communicate that even with higher than average fees, the financial reward is still greater. The 4% is an industry standard percentage that a typical broker will charge on the business sale price, though again it can vary and sometimes is related to the sale price. Factored Financial Risk: The financial risk you are taking, taking into account the percentage chance of success and failure. Projected Final Income: In our experience with option A you are more likely to hit the upper limit of your valuation range and with option B it’s more likely to be toward the lower end of the range. However even if this gap was closer, it would still cause option A to make more financial sense.
The factored financial risk is only £12,000, which you will need to take into account and see as a part of the overall investment in making the sale happen. However, given the increase in the chances of sale and the price achieved, it makes financial sense to sign up with a broker who charges a fee upfront for the extra resource and reach that they can provide.
“How are the fees normally structured? And are they negotiable?” Different brokers structure their fees differently, some ask for a lump sum upfront, whereas other are happy to accept monthly payments, which may be more beneficial for your cash flow. Their fees are also one-off and therefore should not affect your adjusted EBITDA or Net Profit calculations, and therefore valuation. Each broker will have certain parameters within which they sign client’s up. Some will deal with business that have a profit between £250k and £5m, others between £5m and £15m and some will even specialise in certain sectors. So if you fall within the brokers remit then it is within their interest to sign you up, and so fees will be negotiable, in our experience. So, there it is. The answer to the question we get asked most often, and some of the thinking behind our answer. That’s what you get with Firm Gains, straight talking advice when it comes to selling your business. Just the information and facts that you need to know. We are the only independent organisation in the industry, so if you’re thinking of selling your business, then talk to us first, for free. Call us on 01962 609 000 for a confidential conversation on preparation, exit planning and what kind of approach would best work for you.