Upfront Fees for Business Brokers and M&A – Should You Pay Them?

If you are small business with earnings under $300K then you would probably approach a “main street” business broker to sell your business.  It is industry standard practice for business brokers to not charge an upfront fee.  Actually, in most states it is even more than that – it’s the law.  In many states in which business brokerage is regulated under the department of real estate, brokers are not allowed to collect upfront fees that are a part of the sales commission.  If they do charge an upfront fee, it has to be for a tangible product or service such as a formal valuation (not a 5 or 10 page “broker’s opinion of value”).

So that is pretty clear – if you are small and use a broker – no fee.  It is also pretty clear that if your company has $1 million or more in earnings, you will want to use an M&A firm or investment bank and you will not only pay a upfront fee, you also may have to pay a monthly retainer (for very large companies).

But let’s talk about that middle ground, where it really isn’t clear what is what.  In this space business brokers often call themselves mergers and acquisitions advisors and M&A advisors call themselves investment banks.  Some high growth companies with $500K in earnings may well need a good M&A advisor because of the complexities of the business, while a car wash with $1 million in earnings could be sold by a no-fee business broker.

Here’s a couple of things to remember when considering whether you need to pay an upfront fee:

1. Like many things, you get what you pay for
2. However, be sure to ask what exactly you are paying for

What you want to pay for, and what it makes sense to pay upfront cash for, are products and services which help you sell your company and get the best price.  This assumes you agree with the notion that professional marketing of your company increases the chance of getting it sold and with the best price.  These services should ideally be performed (just ask) primarily by professionals, not the broker or dealmaker whose primary payday should be selling the company.  Examples of items you should not mind paying an upfront fee for:

• A professionally prepared selling prospectus (the book).  By the way, there is a big difference between a professionally prepared book and a fill-in-blanks template that some firms use.
• Sales and marketing materials.  Executive summaries, photos, videos, blind web summaries, letters of introduction, etc.
• Marketing research to uncover strategic and financial buyers.   Good research entails using many resources and is very time consuming – and it consists of more than running a list based on SIC or NAICS codes.
• Actual marketing costs of mailings, telemarketing, etc.  (As opposed to a business broker that typically only pays for a web listing service.)

What you don’t want to pay for with your upfront fee are commissions paid to salespeople for signing you up.  Some firms pay up to 50% of the upfront fee to salespeople to sign you up, and that is money that isn’t  being used to prepare and market your company.  What is worse, often those same salespeople are the ones that have complete authority to sign you up, creating an incentive to say all the right things to get the fee.  However, they are not actually responsible for selling your company.

This business model has led to the rise (lots of new clients and fees) and eventual collapse (only sold a small percentage of clients) of some large M&A firms, most notably the Geneva Group.   There are similar companies out there today, often using telemarketing and a seminar strategy.

The best thing you can do is ask directly about how the upfront fee and commissions work.  Where does that money go and what is it used for? I was in Brazil recently and the prospective client really drilled me about fees and commissions.  He was focusing in on the flow of money and where the incentives would be in my firm.  That rarely happens in the US, but it should.  Ask.