So, you made the decision to sell your business. Now what?
The first step after deciding to sell your business is to hire a business broker or M&A advisor. Brokers and M&A intermediaries offer various types of engagement agreements; how do you know which type is right for your business sale?
There are three main types of agreements that you can enter into:
- Exclusive Agreement. An exclusive agreement is the most common type of agreement and requires you to work exclusively with one broker or M&A advisor. In an exclusive agreement, your advisor will receive a commission when the business sells, even if you find your own buyer.
- Exclusive Firm Agreement. In an exclusive agency (firm) agreement, you can sell your business without paying a commission if you find your own buyer, but you can only hire one broker or M&A intermediary to actively promote your business.
- Open Agreement. In an open agreement, a business owner may seek services from more than one broker or M&A intermediary, or even sell the business themselves without paying a fee.
In this article, we walk you through the advantages and disadvantages of each type of agreement and suggest which type of agreement is best for you based on your situation. We also explain other important terms of the agreement you should consider, such as the length of the agreement, cancellation rights, and fees.
Table of Contents
- Exclusive Agreement
- Importance of Interviewing Brokers
- Why enter into an exclusive agreement?
- Exclusive Firm Agreement
- Open Agreement (Non-Exclusive Agreement)
- You Can Work with Multiple Firms
- No Fee if You Find the Buyer
- Disadvantages of Open Agreements
- Other Terms & Conditions to Consider
- Length of Agreement
- Cancellation of the Agreement
- Fees & Compensation
- The Bottom Line
Most common type: An exclusive agreement is the most common type of agreement.
In an exclusive agreement, you agree to not work with other brokers throughout the duration of your contract. Your advisor will receive a commission when the business sells, even if you find your own buyer.
Importance of Interviewing Brokers
It’s essential to thoroughly interview potential intermediaries before committing to an exclusive agreement. Consider their experience, reputation, and online presence. Ask questions to determine their knowledge of the local and national markets, and their general marketing strategy.
Why Enter Into an Exclusive Agreement?
You want someone who is the ultimate advocate for your business. An exclusive agreement is the best way to ensure this. Because they will dedicate hundreds of hours to selling your business, most will want to be the only one representing your company.
An exclusive agreement guarantees you, as the selling business owner, access to tools, resources, and a network of ready-to-act buyers that you wouldn’t otherwise have. With an exclusive agreement, you gain peace of mind knowing that there is a dedicated professional working every day to sell your business. You also gain the benefit of protecting your business’s confidentiality throughout the sale.
Exclusive Firm Agreement
In an exclusive agency (firm) agreement, you can sell your business without paying a commission if you find your own buyer. However, like an exclusive agreement, you can only hire one broker or M&A intermediary to actively promote your business.
The person you hire can cooperate with other agencies to help sell your business, but you must work exclusively through your broker or M&A advisor. The broker receives the commission as long as they secure the buyer.
Open Agreement (Non-Exclusive Agreement)
You Can Work with Multiple Firms
In an open agreement, a business owner may seek services from more than one broker or M&A intermediary, or even sell the business themselves without paying a fee.
No Fee if You Find the Buyer
In an open agreement, if you find a buyer for your business on your own, you will not be obligated to pay a commission. If you choose to contract with more than one advisor, you only pay a commission to the one who closes the sale.
Disadvantages of Open Agreements
While many sellers think an open agreement would be ideal, the reality is that open agreements can create a lot of frustration for a seller. Businesses with open agreements can take longer to sell and may sell for lower prices because no one is fully committed to the sale. In addition, the more people you have marketing your business, the more likely a mistake can occur to threaten the confidentiality of your business sale.
Open agreements are still available in some industries and geographic markets, but they are far less popular than exclusive agreements.
Other Terms & Conditions to Consider:
Length of Agreement
Most brokers and M&A intermediaries require a one-year exclusive agreement, but you can sometimes negotiate a shorter term. On average, the process of selling a business takes six to twelve months. However, it can sometimes take much longer.
The Tail: Regardless of how long the exclusive agreement is, at the end of the contract, your broker or M&A advisor should provide you with a list of potential buyers acquired throughout the contract. You will then be obligated to pay a fee if you sell your business to one of those buyers following a specified amount of time after the expiration date of the agreement (called a “tail”).
Cancellation of the Agreement
Discuss contract cancellation rights with the person or firm you hire. Some agreements allow you to cancel at any time, while others do not.
Fees & Compensation
Typically, brokers and M&A intermediaries receive compensation in three ways:
- By the hour
- Through a retainer
- A commission when the sale closes.
Combination: While most fees are exclusively commission-based, some also use a combination of these methods.
Commissions: Commissions are paid at the closing, and the rate should be negotiated and clearly reviewed in the agreement. Generally, commissions are calculated as a percentage of the sale, usually 10%-12%, although it can also be a flat fee.
Small vs. Mid-Sized Businesses: Business owners with businesses that sell from $100,000 to $1 million can expect to pay a higher percentage rate than business owners with businesses that sell for more than $1 million. Businesses that sell for more than $1 million often pay a commission that is less than 10% of the purchase price.
The Bottom Line
You need someone you can trust. Whether you choose an exclusive or open agreement, your business sale depends on reaching the right buyer — that’s really the bottom line. Reaching the right buyer is easiest when you have a dedicated professional seeking out the right buyer. That’s why exclusive agreements are the most common type.