Should a business owner have to pay a non-refundable deposit to a business broker to enlist the broker’s services? This has been a hot topic for several years. Let’s take a closer look.
History of the problem: For decades, business brokers, like real estate agents, operated exclusively on a success fee basis (i.e. a commission paid at the closing of a successful sale of the client’s business). The percentage of the sale price paid out as a commission could vary from less than 5.0% to more than 10.0%, but the concept was simple – the broker got paid in full at the closing table.
After the recent “great recession,” business transactions became more complex and as such more difficult to close. Changes in both banking laws and bankers’ mentalities made financing transactions troublesome; more stringent environmental regulations often made selling the real estate of the business nightmarish; and buyer/seller confusion on GAAP accounting regulations, the difference between cash and accrual accounting, the ins and out of IRS regulations…well, you get the idea. As a result, a business broker had to work harder and smarter yet he still experienced deals falling apart at (or close to) closing.
The (not great) solution: To offset the increasing probability of a failed deal, business brokers started requesting upfront, non-refundable retainers which would be applied as a credit to the success fee at closing. Retainers could be as modest as a few thousand dollars or a high as $25,000 and up.
Problem #1: The obvious first problem is that if the business does not sell, the seller would be disappointed (at best) or just plain furious. Whatever the seller’s reaction, his retainer was lost and his confidence about a possible sale of his business plummeted.
Problem #2: Whether the broker is a conservative soft spoken local or a “hustler” from out of town, the temptation is for the broker, who knows that he will be getting a non-refundable retainer, to list a business which is (a) virtually unsalable, or (b) so overpriced that no sane buyer would seriously consider a purchase.
The broker, with retainer in hand, justifies accepting the assignment (and retainer) by telling himself there must be “somebody out there who will buy this business.” Wrong. The broker will quickly realize his hopes of selling the business in question are unfounded, his efforts to sell the business will quickly tail off, then cease. The broker keeps a meaningful retainer after a couple of dozen (maybe) hours of work while the seller loses his retainer and dignity.
What to do? A business seller needs to affiliate himself with a business broker who is confident that the combination of the attractiveness of the seller’s business, the seller’s integrity, solid financial reporting, and a market based listing price will give the broker the necessary tools to tackle the sale of his client’s business without any upfront money.
The business broker and business seller should be partners of a sort – the seller is the big partner who supplies the business. The broker is the little partner parlaying his valuation skills, overall business knowledge, financial acumen, and transaction experience to find a solid, qualified buyer for his client’s business, and then shepherd the deal to the closing table. Both seller and broker will be rewarded handsomely for their partnership. And this successful joint effort will not be darkened by the unnecessary cloud of a non-refundable retainer.
Contributed by Michael Greengard, Praxis Business Brokers.
Through the Michigan Chamber’s partnership with Praxis, we can guide you through a step-by-step process of the complexities, all while maintaining complete confidentiality. To learn more about selling your business, please contact Lindsay Fulton at email@example.com or 517-371-7691.