Six questions to ask a business broker before signing the contract
Retaining a business broker, business transfer agent or M&A advisor ("intermediaries") to assist with taking a business to market often begins with shortlisting a few of the best firms.
But once a shortlist of intermediaries has been compiled, how best does a business ascertain which one is the best fit? It could do worse than to start with these questions:
1. Have you any examples of businesses like mine you've successfully sold?
An intermediary with experience selling businesses in your industry is more likely to sell your business, as their network includes the right type of prospective buyers.
Ideally, the firm would be able to provide testimonials from named (not anonymous) business owners who’ve successfully sold through them.
Sector expertise can be tested by requesting their suggestions on, for example, growth opportunities in your industry they believe you should be pursuing.
2. Who will be handling my account?
It’s not uncommon for a salesperson to sign a client up before handing them on to poorly trained call centre staff!
Who in the company will be providing what service? Who's providing valuation guidance, and are they qualified valuers? Who'll be the key advisor and is that person capable of providing advice on all exit options, not just trade sales? Who'll be handling the marketing?
You also might want to know to what extent they lack expertise in-house and impose on clients the responsibility of hiring outside professionals.
3. What can I expect at various stages of the process?
How much of the work will the intermediary be doing? What work? And how will they keep you updated?
Any assurances made about how the project will progress are just oral assurances. Vendors wishing to rely on these would be well advised to request that the contract or engagement letter spells out their expectations.
4. Where, how and for how long will you market my business?
To find buyers these firms may run marketing campaigns, send feelers through their network and run research operations. What methods are they going to use to place your business?
The Confidential Information Memorandum (CIM) is a key document that the intermediary will be forwarding to qualified buyers. It's perfectly reasonable to ask for samples of previous CIMs. Do these look well written, persuasive, professional?
5. What happens if we change our plans?
Things happen. Strategic goals change. Trading environments evolve. How would such changes affect the arrangement you have with the intermediary? Is there a long "fee tail" or other long-term contractual obligations?
6. What are the costs?
Starting with questions about costs tends to send the wrong message, and is the only reason this question features at the bottom of this list rather than the top.
Fees and charges in the industry can be quite complex. The size of retainers varies widely. Some firms insist the retainer is paid in full at the start, while others spread it over several months. A few even deduct the retainer from the final "success fee", the fee payable if the business completes on a sale.
Success fees vary too, with some intermediaries using the Lehman Scale and others using one of its many variations. The final sale price on which they calculate this success fee can itself be a complex matter.
How much will they charge, when will they charge it and what does each charge cover? Is there potential for divided loyalties i.e. will they get any compensation from other parties, like buyers or investors, in relation to your business?
Clinton Lee maintains the UK's largest knowledge base on business intermediaries and assists business owners selling their businesses to find the right business broker, negotiate the right deal and maximise the value they extract from their business.
You might also be interested in
After doing an undergrad degree in accounting (India) and reading for an MBA in finance (USA) - in addition to taking professional exams in Cost & Works accounting and in Banking - I decided that this is all too complicated. So I spent 35 years buying and selling small businesses, and running them.
My full time occupation now is...