7 minute read

Letter to a Business Owner: Addressing Concerns about Hiring a Business Broker

The following is a real-life example of a conversation I've had with some business owners regarding their anxieties over signing the engagement agreement. While not every owner is hesitant about signing the agreement, there are always questions about the language, responsibilities, and requirements detailed in the agreement. In a few instances, I've written a letter to the owner and I've shared an example below. If you are a business owner and have apprehension about selling your business and signing the agreement, I hope this article helps ease your fears.

Business owner: "I'm ready to sell my business. Let's meet and get the process started".

Me: "Sounds great."

The appointment is scheduled, we discuss the process and review the engagement agreement outlining the duties and responsibilities of each party.

The meeting goes well.

Business owner: "It all seems fine but before I sign, I'm going to send this to my attorney for comment".

My stomach sinks because I know that I'm likely going to spend a few hours explaining to the owner and her attorney why the agreement is written the way it is.

I understand the need to be cautious and seek legal advice when needed. It is perfectly acceptable (and expected) that you get a legal opinion before signing a contract so you can be fully informed of the legal ramifications. I do the same. I also know that a good business transaction attorney is a tremendous benefit to getting a sale completed. I've worked with some great ones that have saved deals from disaster.

However, some attorneys, especially those that aren't business transaction attorneys, want to modify the business brokerage or mergers and acquisitions engagement agreement between the business owner and the brokerage firm. This is a deal-killer right up front for the business brokerage firm.

Most reputable business brokerage firms, especially nationwide franchises, have spent considerable effort and dollars to create engagement agreements that cover the important points for a seller and brokerage relationship. The engagement agreement has been legally time-tested and successfully used in thousands of seller representations. The purpose of the agreement is to memorialize the meeting of the minds and mutual understanding between the business owner and the business brokerage.

In essence, the engagement agreement is: You promise to do this, and we promise to do that. Generally, in most situations, the agreement is signed and filed without ever requiring review again by either party, unless one party doesn't abide by the agreement which is another story for a different day.

The letter below is based on real correspondence sent to some business owners whom I assume shared it with their attorneys. Most of the owners accepted our agreement. For the others, I believe it's only a matter of time.

Dear Business Owner,

I appreciate how difficult it is to decide to sell your business. Your life will change and usually that's a good thing. Unfortunately, many business owners are forced to sell when one of the "Dismal D's" occurs. {Dismal D's are declining sales, dissention among owners, disinterest, disaster, distraction, debt, divorce, disease, disability, death}. Often this puts the seller at a disadvantage for price and deal structure. The COVID shutdowns were an example of a "disaster" which none of us could have predicted. The good news is your business made it through because of your loyal customers and good decisions on your part.

To help you understand the business buy/sell process, there are several resources that can help. One is a book by John Warrillow called, "The Art of Selling Your Business". Another book written several years ago, with still relevant advice for both buyers and sellers, is "Strategies for Successfully Buying or Selling a Business" by Russell Brown. Both books outline the business sale process and explain the roles and responsibilities of the different parties (buyer, seller, intermediary/broker, attorney, CPA, etc.).

Regarding the redline changes requested by your attorney on the engagement agreement, I understand that your attorney's default mind-set is to protect you from every possible known and unknown risk by playing defense on your behalf. Unfortunately, life is about taking calculated risks. You as a business owner understand that better than most. Like you, I am self-employed. However, unlike your business that provides a service or product and receives payment immediately or within a few days, I typically get paid only if and when the business sells which could be months or years from now, if it sells at all.

There are myriad circumstances that prevent business sales from occurring and that means I must make good decisions before agreeing to work with you and spend my time and resources to take your business to market. Unfortunately, there have been multiple ways that business brokers have been manipulated out of the fee due after performing the work. While I don't anticipate such an issue, or that you wouldn't pay, neither of us can predict the future or any of the multiple variables that could arise.

Therefore, I am unable to remove the language in the agreement that provides this protection. To sell a business not only must we (you and I) be aligned, but your attorney and CPA must be aligned with both of us so that we may work together as a team to successfully sell your business.

Very, very rarely does a business sell for the listed/asking price. Why? Because buyers expect to negotiate based on their assumption that the business is over-priced, even when it isn't. That makes sellers want to ask more than the likely value to allow for that negotiation room. However, there is much more to consider in selling a business than the price.

The transaction terms are as important, if not more, than the price. For example, if seller financing is offered, that may encourage a "full-price" deal. If the seller wants "cash only", then expect a discount. There's an old saying, "you name the price and I'll name the terms" when it comes to negotiation. For example, you want to sell for $1,000,000 and the buyer agrees to the price with terms of $100,000 down and $100,000 per year plus interest at 10% for the next nine years. Or would you prefer to have $800,000 cash today? Which is the better deal? It depends upon your needs and desires in cooperation with the buyer's needs and desires.

My point is that price and deal terms go together. The buyer generally has some fear about the successful continuation of the business after the sale because of possible future risks. Will there be customer attrition? Will the employees show up? Will the equipment breakdown? Will the raw materials be available? And so on. These fears and concerns create the buyer's perception which is the basis of the buyer's offer of price and terms.

Prior to entering into an engagement agreement with a business seller client, I attempt to determine the answers to the following questions. Often, I must use my best judgement because there is no way to get a definitive answer now.

Do I believe the seller is motivated enough to sell when I find a qualified buyer?
Does the seller have good financial reports and tax returns?
Are there lots of add back adjustments required?
What deal terms will the seller accept to make the transaction happen?
Will the buyer make it through due diligence without getting cold feet?
Can I trust the seller to be straight with me?
Will the seller provide me with the information needed to answer all the buyer's questions and alleviate concerns?
Will the bank lend to the buyer?
Will the seller agree to provide some financing if needed?
What happens if the bank's appraiser shows a lower value than the negotiated purchase price? Will the buyer and seller renegotiate the deal?
Will the buyer and seller attempt to collude and end the contract?
And more...

As a business broker, I spend my time and resources upfront to market your business, vet potential buyers, negotiate offers between you and the buyer, guide the buyer through the financing process, manage due diligence, handle communication issues, negotiate a new lease, ease fears, get questions answered, and much more, for the expectation of getting paid if and when the sale is fulfilled. This process generally takes 9 months to a year and sometimes longer.

There is no guarantee that a sale will be made at all or that I'll ever receive compensation for the efforts made. So, unless you provide a buyer interested in buying your business at the time of signing the engagement agreement, please don't ask me to reduce the fee or remove the language that allows me to get paid.

I offer a discount for seller-identified buyers because the scope is restricted to only those buyers for a limited time. In theory, it takes less time to sell the business to this type of buyer because it is believed they have previously expressed a bona fide interest in buying your company as a result of having had meaningful discussions with you. The limited scope and time reduction supports the reason for the discounted success fee.

However, if these prospective buyers don't make an offer until weeks or months after the business has been on the open market, a discount doesn't make sense. At that point, I will have spent my resources to find other potential buyers. Further, two separate fee arrangements with different buyers misalign our mutual objectives. Here is a perspective to consider. What incentive would a business broker have to encourage an offer from a "discounted buyer" if the company was being fully marketed to all potential buyers? We must be fully aligned in our agreement.

Once all is said and done, my experience tells me that you'll see that the process of selling your business was not easy or fast and that every dollar paid for my service was earned. I know there is no guarantee that I'll receive payment for all my efforts due to the success-based nature of the fee agreement. However, through our engagement agreement, I am motivated and aligned with you to sell your business for the highest price possible.

I am not in the business of taking advantage of sellers (or buyers). If that were the case, I couldn't live and work in the same town as you for all these years. I realize there are "bad apples" out there, and I will happily provide references before we start.

No one can force you to do a deal you don't want to do. There is nothing in our agreement that says you must sell the business if you change your mind about selling. Every day someone is buying a business. It could be yours. Let's work together to make that happen.

Sincerely,

Your Business Broker