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.
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.