Should My Banker or Broker Only Be Paid a Success Fee? Insights from a Business Sale Dilemma

Explore the complexities of compensation in business sales. Learn why bankers and brokers prefer a mix of upfront fees and success fees over 100% commission models. Understand the risks and work involved in selling a business.

Mike Blake


Selling a business is a complex and nuanced process, often leading to debates about the ideal compensation model for bankers or brokers involved in the sale. A recent scenario involving a friend who wants to sell his profitable and well-established business sheds light on this issue. His preference for a 100% success fee arrangement for representation in the sale process brings up several crucial points worth discussing.

  • Business for Sale: The business in question boasts a valuable patent portfolio, profitability, and robust systems.

  • Owner's Stance on Compensation: The owner insists on a 100% success fee for any representative helping to sell the business, mirroring his sales commission model for his employees.

  • Challenge in Finding Representation: This stance has led to difficulties in securing investment bankers or brokers, who generally require upfront fees and retainers.

Understanding the Complexity of Commission Sales vs. Brokerage Success Fees

  • Upfront Work for Selling a Company: Unlike product sales, selling a company involves extensive preliminary work, including weeks to months of preparation.

  • Costs Incurred by Bankers: Bankers bear significant costs, primarily in skilled labor, during the initial phase of selling a business.

  • Risk of Seller's Change of Mind: There's a tangible risk of the seller deciding not to sell, a factor uncontrollable by the banker.

  • Dilution of Focus with 100% Success Fee Model: Accepting only a success fee may lead bankers to juggle multiple clients, resulting in less focused and proactive selling efforts.

  • Risk Transfer and Fairness: A 100% commission model attempts to transfer deal risks entirely to the banker, raising questions about fairness and shared risk.

The reluctance of bankers and brokers to engage in a 100% success fee arrangement isn't without reason. The upfront work, risks, and costs associated with selling a company necessitate a more balanced approach to compensation. While it's understandable for business owners to seek arrangements that align with their principles, such as complete commission-based models, the uniqueness of selling a business requires a different framework. This scenario underscores the need for business owners to consider the complexities and risks involved from the perspective of their financial representatives.