Selling your business is even more complex than selling your home. Just like most people looking to sell their house or commercial property work with a real estate broker, business owners or corporations looking to sell their business usually choose to work with a business broker for a number of reasons, some of which are more obvious than others. No matter what business broker firm you choose, you will need to have a contract or agreement in place that stipulates the details. Most firms use standard business listing contracts or seller representation agreements that stipulate all the key terms defining the relationship between a business owner and a broker.
Broadly speaking, there are two types of Agency Agreements: Exclusive or Non-Exclusive.
Seller Representation Agreement Between Broker and Seller
When you decide to sell your house and hire a real estate agent you enter into a real estate broker agreement. Similarly, when you retain a reputable business broker to help sell your business, you will enter into a business broker agreement, commonly referred to as a business listing contract or seller representation agreement. Both agreement types are documents between business owner(s) or a corporation and a business broker that spells out the terms of the agreement under which a broker is to sell your business.
Details on what exactly a business broker is offering, such as an exclusive network of business buyers, marketing strategies and fees, are often spelled out in these agreements. Business Broker Seller Agreements also state whether or not the broker will represent the seller exclusively, non-exclusively, or semi-exclusively.
A non-exclusive agreement means that the business seller will have more than one business broker. Each individual business broker the business seller works with will have to have a separate agreement. Fees and terms differ from an exclusive contract as you are working with more than one business broker and may be trying to sell the business on your own in order to avoid paying a commission to any of the brokers.
Advantages of Signing a Non-Exclusive Agency Agreement
1. With a non-exclusive agreement, the business seller may work with multiple business brokers if they are not satisfied with the performance or believe that working with multiple brokers will improve the odds of making a successful sale.
2. The seller may not have to pay a commission if they find a buyer on their own, assuming the seller is able to handle the negotiations, due diligence, paperwork and escrow without assistance.
In short, sellers often prefer a non-exclusive contract because they believe that they are increasing the expected returns either by improving the odds of making the sale or because they may be able to reduce the expenses.
However, most experienced business brokers do not work on a non-exclusive basis. More importantly, seasoned business brokers are highly unlikely to invest resources in selling a business if the likelihood of payout is low. In short, the brokers that are willing to work on non-exclusive basis are either inexperienced or will invest only a minimal amount of time and resources.
Indeed, it is entirely rational, albeit irresponsible, to take as many listings as possible on a non-exclusive basis, invest minimal effort, and hope to get lucky. In other words, it is unlikely that a seller will benefit from working with a broker that lacks either experience or motivation. Therefore, non-exclusive listings are usually not favorable for the sellers.
There are other reasons why a non-exclusive listing may not be a good idea. For example, trying to keep the sale of a business confidential with a non-exclusive agreement is nearly impossible. If you do not want your current employees and/or competitors to know you are selling your business, then a non-exclusive agreement would not be a good choice.
A semi-exclusive agreement (or an exclusive business broker agreement) implies that the seller can sell their own business without having to pay a commission, the same as in non-exclusive agreements. However, unlike in the non-exclusive agreements, the business seller works with only one business broker.
This seems to be a happy-medium option for both the business seller and broker to have advantages in place for both parties. The business seller gets to have a dedicated business broker with the option to sell on their own without having to pay any broker fees. The business broker gets the advantage of not having any competition from other brokers. Sadly, there are also disadvantages in having a semi-exclusive agreement. Again, they are mostly related to aligning the business seller’s and the broker’s incentives to produce the best results.
Disadvantages of a Semi-Exclusive Agreement
1. The business broker may fear that his role is merely to bring in the competing offers to serve as a benchmark to the business buyers that are already in contact with the seller. Clearly if a broker feels that way, they will have little incentive to invest in marketing or give their best efforts to sell the business.
2. The business broker will not be able to be seen as a trusted advisor to the seller. There will almost always be a conflict of interest. For example, if the broker suggests that the seller should accept an offer from the buyer introduced by the broker, the seller may suspect that the broker is merely serving his own agenda. Chances are that a broker might not be entirely committed and acting in the best interest of the business seller at all times.
3. Any bidding process between a buyer introduced by the broker and a buyer that is excluded will be flawed. The seller will value the offers differently from their face values, as the main incentive will be the net amount that the seller gets. The buyers may become aware of that and will not provide their best bids in many cases. The business broker will of course be aware of the entire dynamics, and will likely adjust his efforts in respect to a much lower probability to collect a commission.
Even a limited exclusive business sellers agreement will affect the dynamics between the business seller and the broker. Even with an exclusivity to only use one business broker, the incentives to perform at optimal levels are just not the same as in an all-exclusive agreement.
An exclusive agreement is the most commonly used type of agreement when selling a business through a broker for a very good reason. Simply, this type of arrangement ensures a close alignment of the incentives between a seller and a broker. Deciding on an exclusive agreement with a broker may still sometimes feel like deciding whether to marry someone after only a few dates. However, in most cases, experienced business brokers work on a commission basis only, for a number of reasons. The selling of a business, if done properly, is time and resource intensive. Among other things, a good business broker will make sure to produce high-quality marketing materials, advertise on all relevant platforms, invest sufficient time in promoting the business, keep the required level of confidentiality, respond to all inquiries in a timely manner, tailor communication to each potential buyer, pre-qualify the business for an SBA loan (if applicable), keep the seller posted about all relevant developments, ensure good communication between the potential buyers and the seller, serve as a trusted advisor to the seller, lead the negotiations process, manage all the service providers during the closing process, and manage and/or support all the other activities leading to the most favorable outcomes for the seller.
Advantages of Signing an Exclusive Agreement
1. An exclusive business broker agreement aligns your incentives with the broker. If the business broker knows that in the case there is a sale, he will collect a commission, the business broker will have a direct interest in putting forth his best efforts, preparing high-quality marketing materials, investing in promotions, actively pursuing buyers, and working towards the most favorable agreement for the seller.
2. The business broker will not be concerned with competing with other business brokers for buyers. Because of that, the broker will be able and willing to disclose the information about the business to all the potential buyers. The business will get far more exposure, leading to more potential buyers, leading to a higher price in most cases.
3. The business broker will not be concerned about being circumvented by the buyers. Many times business buyers know that if they talk directly with the business seller, the seller is likely to provide additional discounts instead of paying a broker’s fee. Indeed, in most cases, buyers can avoid the broker merely by setting up a new legal entity in their or another name. It only takes a few hours and a few hundred dollars to set up an LLC in the US, so – understandably – there is a very strong incentive for buyers. That, in turn, obviously affects the brokers’ motivation and their willingness to invest time and resources in selling a business.
4. The business broker has a stronger incentive to give the seller an honest and unbiased opinion on how to handle all the issues in the business sales process. For example, the business broker will not be concerned that they might lose the sale to an alternative buyer from the business seller or another broker. A business broker will push for the best deal if they are working with an exclusive agreement in order to secure the highest possible commission.
5. The business broker will have to spend far less time tracking contacts with the prospective buyers in order to be able to collect the commission before presenting the information. Among other things, this will have a tangible direct impact on the number of potential buyers the broker can procure.
6. When choosing which accounts to work diligently at to sell a business, most business brokers will choose to focus on accounts that have a higher expected return value. Needless to say, an exclusive listing certainly provides the likelihood of a higher ROI for a broker. Business brokers prefer spending more time working on an exclusive listing.
7. Even if the business broker does not procure the buyer that ultimately buys the business, the business broker can create a lot of value by bringing competing offers. The possibility of someone offering a larger bid or more competition joining in will certainly motivate any buyer. Competing offers from other buyers will also validate, and likely increase, a potential buyer’s opinion about the value of the business. All of this leads to higher selling prices.
The reasons above make a very strong case as to why most business brokers deal with exclusive agreements.
Nevertheless, deciding on an exclusive agreement with a broker may still sometimes feel like deciding whether to marry someone after only a few dates. The business seller should always ask for references or case studies from a business broker to make sure they are choosing a qualified broker. If you find a trusted and qualified business broker you will only need one to sell a viable business.