As the President & CEO of the largest business brokerage firm in the Pacific Northwest with a double-digit team of knowledgeable, experienced, highly skilled intermediaries, a frequent conversation held with members of my team relates to the commissions we charge our clients for professional representation. For the unfamiliar, IBA has operated for 47 years with a 100% paid on performance business model where we seek no retainers or administrative fees from our clients upon taking on a “sell side” project and only wish to be paid upon successful completion of a transaction. The business model necessitates achievement for success, so intelligent client and project selection are critical.
The commission discussion held, especially with new brokers at IBA, often starts with something like the following:
“I really want this listing. Do you think I should discount my commission as a sales technique to position myself apart from my competition and win the project?”
As a nearly thirty-year business broker who has successfully completed over 300 transactions personally, my response is consistently the following:
“You are closing the sale with the wrong information.”
This brings us to the question, “Why should an entrepreneur hire a top tier business broker to sell their company?”
The following are the top three reasons a business owner should seek to hire the best business brokerage firm and intermediary possible to sell their business:
Sale Price and Not Commission is What Matters
It is prudent for intelligent people to negotiate commissions when selling a commodity where a market value is clearly defined. In this situation, you are hiring someone to facilitate a sale, not to negotiate a sale. This is not the case when selling a business. The market value of a business is subjective and will fall in a range of prices depending on the motivation of the buyer, the uniqueness of the business, and the ability of the intermediary. It is in the best interest of every business seller to be as high in the range as possible and every buyer to be as low. The knowledge, experience, and skill of a business brokerage professional can greatly impact where on the sale spectrum the business transaction is completed. It is strongly recommended that the best possible business brokerage professional be hired when selling a business. The following is a numerical example of why the potential sale price achieved and not the commission charged should be the metric for evaluation:
Consider a privately held company that would sell within an approximate 20% range between $2.4 – $3.2 million (3 to 4 times EBITDA of $800,000) in a good faith negotiation between parties.
As a baseline, let’s say that the seller without representation could sell the business for $2,400,000. If the party is happy with this financial outcome and willing to do the work necessary to facilitate the sale, this minimum threshold achievement is likely possible in the described scenario.
Now, let’s say a top tier M&A intermediary can sell the business for $3 million. If their contingent fee is 8% of the sale price or $240,000 the net to ownership on the sale would be $2,760,000 or $360,000 above what could be achieved by the seller on their own. Post transaction analysis, easily shows that more money was earned on sale and more intermediary responsibilities were delegated to a professional than in the first scenario, resulting in a clear result of which of the two was in the best interest of the entrepreneur.
Now, let’s compare another option, a business owner can hire the best business brokerage firm in the marketplace and pay 8% of the sale price or hire a broker without a significant track record of success at 6% who claims they will work hard for you if given the opportunity. Acknowledging, experience and proven ability matter let’s say the “B” grade business broker can achieve a value between the “A” M&A intermediary’s $3 million and the FSBO (For Sale By Owner) $2.4 million of $2.7 million in the marketplace. $300K more in sale price demonstrates value was achieved by the business owner by hiring the professional, so payment of a commission of $162,000 is earned and warranted. Subtracting the commission from $2,700,000 the net proceeds to the business owner are $2,538,000 in this scenario, an amount of $138,000 more than the FSBO sale, but $222,000 less than what a top tier business broker could achieve.
Business brokers are no different than attorneys or other professionals. You get what you pay for in terms of knowledge, experience, and ability. If you were charged with murder would you want Perry Mason representing you or an attorney who graduated from law school during the pandemic? If you are hiring an M&A intermediary do you want the professional who can sell your company at a premium value in an environment of confidentiality employing best practices or a broker watching videos and reading articles published by a trade organization to learn how to problem solve through a situation?
The Timing of the Sale is Important
Frequently when selling a business, the timing of the sale is as important to the business owner as the sale price. When an entrepreneur makes an executive decision to sell their company a strong desire commonly exists to achieve that goal and move on to the next chapter of their lives. Hiring a top tier M&A intermediary results in obtaining an experienced guide to manage the sale process. It should also enhance the velocity of the sale through the acquisition of a knowledge of buyers in the marketplace and proven processes & systems to progress those parties from introduction of a business acquisition idea to closing. Insider Tip: If you are evaluating a business broker’s confidence in their ability to sell your company look at the term of their engagement contract. IBA traditionally sells businesses three to nine months after we list a business for sale and employs a six month listing agreement. We know of competitors who ask for a two-year agreement and significant retainer up front. In our view, they are speaking volumes about their confidence to get the job done on day one.
Resources
In life it is often not what you know, but who you know that makes the difference. Another asset being acquired when an entrepreneur engages a top tier business broker is their Rolodex of resource contacts. It takes a village to complete a business sale transaction. Parties ranging from attorneys to accountants to wealth advisors to bankers to specialty parties (e.g., environmental inspectors, appraisers, 1031 exchange facilitators, etc.) all play important roles in deals. Just like you want to hire a “best of the best” business broker to represent your interest, it is also prudent to hire “best of the best” professionals for other roles. The last thing a party should be doing with a deal on the line is searching Google for a solution. Insider Tip: LinkedIn provides a great tool for researching the network of a business broker. Common connections also should enhance confidence in a party. IBA’s VP of Business Development, Curt Maier, conveys frequently, a person’s net worth as a professional is often demonstrated by their network (https://ibainc.com/blog/curt-maier/net-worth-network-the-foundation-of-a-successful-professional-personal-life/) IBA is blessed to have him on our team and his significant Rolodex available for the benefit of our clients.
IBA is not the only quality business brokerage firm serving the Middle Market and Main Street in The United States. We happily recognize our quality peers in the industry and often collaborate with them on deals. We strongly believe the industry is better and stronger the more knowledgeable, experienced, highly skilled intermediaries exist facilitating transactions. Our only ask is that if you are considering the sale of a privately held company or family business in the Pacific Northwest, that you include us in your interview process. We are confident that following that engagement you will recognize why IBA has sold more businesses in the Pacific Northwest than any other firm in the region since 1975.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family-owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.