There are some (often) large broker organisations whose business models include very substantial upfront fees for marketing a business for sale (and it may not necessarily preclude additional substantial success fees at completion!) This article looks at a couple of the reasons given for making the charges upfront and whether, in our view, these arguments ‘hold water’. We should declare at this stage that our ‘evidence’ is not gathered from an unbiased sample – rather, it is mostly from disappointed sellers who have paid the large fees upfront, not subsequently sold their business and eventually felt the need to write off those fees and start the process again with a different business broker.
You are told ‘The upfront fees are to cover our upfront marketing costs’
The Briefing Document (often referred to as the ‘IM’) which is prepared to present the business is an important document and can involve substantial amounts of skilled input, but 5 to 10 man days is sufficient in the vast majority of cases in our experience.
We can ignore the costs of online marketing and email bulletins to in-house databases etc since the costs of electronic marketing are pretty low, certainly relative to the eye-watering upfront fees sometimes demanded!
The 3rd leg of marketing a business tends to be direct approaches, typically to trade buyers, to make them aware of the acquisition opportunity. This can be labour intensive if done properly, involving building up an appropriate target list, pre-checking their financial strength and identifying the right contacts within those organisations ahead of any approach. However, we have seen examples of the reality actually being an off-the-shelf, poorly targeted database (for example a Plimsoll report) and being worked by a relatively junior person within the broker organisation. One disappointed seller we spoke to checked the profiles of the broker ‘marketeers’ on LinkedIn and was surprised at how junior and lacking in experience they were. Skilled resources are required to perform this element of the marketing well, but in our experience there is often a significant disconnect between the claimed ‘value’ and the cost of the resource deployed to perform the role.
You are told ‘We will sell your business for more, so don’t worry about the upfront fees’
It is a fairly blunt argument but we also come across it frequently and it is no coincidence that those who charge the highest upfront fees often provide the most seductive business valuations!
Business brokers should reasonably be expected to positively influence the deal if they are doing their job properly, both in terms of top line price achieved and deal structure. However, brokers are neither magicians nor hypnotists and are not able to completely detach buyers from their business faculties! There is a reason why buyers have the financial resources to buy a business and it is normally because they are shrewd business people, who understand the value of what they might be acquiring. There is a reason why the vast majority of private businesses sell for a multiple of between 3 and 5 times sustainable earnings, depending upon sector etc and buyers understand this.
I met recently with an owner of a small engineering company, diagnosed with lung cancer in early 2014, who wanted to sell his business before the inevitable and avoid leaving the problem of disposal of the business to his wife. He met a representative from a large broker and the gist of the conversation was the following:
Broker “How much do you want for your business”
Seller “Including the freehold, I would like to get about £800k, I think that is realistic”
Broker (laughing loudly) “Is that all? Don’t worry, I’ll get you £1M tomorrow, and I will only charge you £50k of the extra £200k”
Nearly 12 months later, the seller had made no progress on a sale with the broker but had potentially found a buyer himself. The offer was below £800k and he wanted a 2nd opinion on whether it was a reasonable offer (our advice was that the offer was sufficiently close to the best he might achieve and that he should work with the buyer to get it over the line).
Anderson Shaw Corporate Finance Ltd
Our fees are very substantially success-based and we believe this is absolutely as it should be. We do charge small upfront fees but only sufficient to ensure that clients are also genuinely committed to the sale process.
The journey of selling a client’s business can often be a year or more and will nearly always have some challenges along the way – it is the nature of the beast. We believe it is right to travel that journey ‘hungry’, human nature suggests that we will do a better job because of it! It may be one of the reasons we sell nearly 90% of those businesses we are mandated to sell.