Why Exclusive Engagement Agreements Are the Norm
Types of Listing Agreements for Business Brokers
Selling your business is a big decision and the process can be overwhelming to those who are unfamiliar with the market. Your first step, after deciding to sell your business, is to hire a business broker to assist you throughout the selling process. Do a simple google search and you will discover that there are many brokers out there and they offer various types of agreements, such as the exclusive listing or the open listing, to help you sell your business. How do you know which broker to choose and what type of agreement to enter into with that broker? In this article, prepared by Jacob Orosz, of Morgan & Westfield, we will help you understand the basics of the listing contract in all its various forms.
The Listing Contract
Essentially, when you work with a business broker, you are entering into a listing contract. A listing contract is a legal agreement between you and the broker whereby the broker agrees to sell your business on specific terms, and you agree to adhere to those terms. Brokers use one of three types of contracts, all of which are outlined in detail below.
An exclusive listing is the most common type of agreement when selling your business through a broker. This means that the broker is the only one allowed to promote the business for sale. In return, the broker receives the full commission for selling the business…Because of the time [and money] they invest in packing, marketing and selling the business, they want to be the only one who gets paid for the sale. If you have an exclusive listing, your broker will receive a commission, regardless of whether or not the broker brought in the buyer.
The obvious question that follows is: why would [a seller] want to enter into an exclusive listing with a broker? This is because the broker invests a lot of time and resources into initially preparing your business for sale…Your broker will do all of the advertising and marketing of your business and knows how to target the right buyers. The broker may also invest a significant amount of [time and] money in marketing the business for sale…The broker will negotiate the contract for selling the business and help you close the deal. Finally, the broker knows how to navigate all the legal documents and requirements for the sale and closing of your business.
…Your broker is your business’s main champion while you are under contract…Therefore, it is essential that you take the time to interview each potential broker before committing to one. Just like with a potential employee, you should look at how much experience each broker has, the broker’s reputation in the community, and the broker’s presentation on the internet. You should ask questions that address the broker’s knowledge of the ups and downs of the market, both locally and nationally…
Once hired, your broker will become an advocate for your business. The contract will describe all the terms you agree to, including that the broker will exclusively represent you throughout the duration of selling your business and will solely receive the commission as compensation.
Open Listing (Non-Exclusive Listing Agreement)
In an opening listing, you are allowed to use more than one business broker or even sell the business yourself. In the exclusive listing above, if you find a buyer by yourself, you will still have to pay a commission to your broker. However, with an open listing, you do not have to pay any commission if you find a buyer who is ready, willing, and able to buy your business. If you choose to hire more than one broker, you only pay a commission to the broker that finds a buyer for your business.
Many sellers think this type of listing is the ideal situation for a seller, as it appears to create a much wider market and can save you money if you find a buyer yourself. However, most brokers will not agree to this contract because they want to ensure a commission for the time they are investing in selling your business. In other words, you will generally only find inexperienced brokers will agree to an open listing contract. Also, because so many people are involved in selling your business, it can become troublesome if you want to keep the sale of your business confidential.
Exclusive Agency Listing
In an exclusive agency listing, you are still allowed to sell your business without paying a commission if you find your own buyer. However, like the exclusive listing, you can only have one broker promoting your business. The broker cooperates with other agencies to help sell the business, but you are obligated to only use the one broker you contracted with. The broker will receive the commission as long as the broker brings in a buyer, regardless of the method used.
Why Exclusive Listing Agreements Are the Norm
As mentioned above, brokers are mainly interested in exclusive listing agreements so they can ensure that they receive commission for the work that is put in to selling your business. Preparing your business for sale, promoting your business, and securing a buyer requires a lot of time, work, effort, and resources. In fact, it takes so much time that a broker will typically require a 6 to 12-month contract to sell your business.
It may feel counter intuitive to commit your business to one broker for so long, as multiple brokers trying to sell your business may seem to yield a buyer sooner. However, an exclusive listing benefits you in many ways. If you are committed to only one broker, that broker will be more willing to commit the time and effort it takes to sell your business. With multiple brokers competing to sell your business, none of them will feel confident in contributing their full time and resources to sell your business only to end up with no commission. If you take the time to interview brokers as we suggested above, you can rest assured you are putting your business in capable hands.
Other Terms and Conditions to Consider:
Length of Listing
If you are not comfortable with committing your business to one broker for a year, remember that you can negotiate in the contract how long you will list with that broker. You can always try a 6-month contract instead. However, if you are comfortable with your broker, you can have a contract over a year. It might not take that long to sell your business, but it gives your broker the time to find the best buyer for your business.
Cancellation of Contract
Remember to discuss cancellation rights with your broker. Some listing contracts will allow you to cancel any time you want, in which case it does not matter if your contract is longer than a year. By providing you with cancellation rights, the broker is essentially giving you a way to opt out of the contract if you are not satisfied with the service being provided.
Expiration of Contract
A contract expires when the agreed upon time has expired. Both parties can agree to renew the contract if they are still happy with the services. Nonetheless, at the end of the contract, the broker should provide you with a list of the potential buyers acquired throughout the duration of the contract. Remember that in an exclusive listing agreement, locating a buyer and closing the sale before the contract expires will result in a commission being owed to the broker.
Brokers receive compensation in three ways, by the hour, through a retainer, or with a commission at the end. Of the three, the commission is the most likely the one your broker will expect. Some brokers also work using a combination of these methods.
With a commission, you pay the broker at closing. The details regarding the exact time you pay your broker will depend on the terms of your contract, though it is usually when you close on the sale of your business. How much you pay is negotiated in the listing contract, and it is a percentage of the sale, usually 10 to 12 percent, though it can also be a flat fee. If you own a smaller business that will sell from $100,000 to $1 million, you should expect to pay on the higher end of that percentage range. For businesses over $1 million, brokers will usually employ the Lehman or Double Lehman scales, ranging from 2-6% of the purchase price. Nonetheless, you can negotiate the commission if you feel the initial offer is too high. The commission not only provides compensation to the broker for her time, it also provides reimbursement for expenses such as listing the business for sale on websites and otherwise marketing and promoting your business.
The Bottom Line
Basically, you want to find a business broker you can trust, and generally, the most trustworthy brokers will want an exclusive listing contract. Though you may be a bit wary of it at first, remember that most of the terms are negotiable, including the length of the contract and the commission fee. If you want a broker to sell your business, we offer brokerage services WITHOUT requiring a contract, and we are here to help in any way we can.
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The Summit Acquisitions Group — Business Brokers and M&A Advisors — specializes in the sale, appraisal, and financing of privately owned companies ranging in valuation from $750,000 to $25,000,000. Contact their offices in Atlanta, GA or Charlotte, NC for a free consultation.