Signing an agreement with a business broker is one step in a longer journey you’ll take after a decision has been made to sell your beloved business.
Yes, it’s a part of an extended process, but it’s a crucial one, because signing the wrong agreement with the wrong broker can devalue your business and create one hell of a headache down the track.
In this article, we’ve broken the agreement process down, paying particular attention to exclusive agreements, otherwise known as the ‘Exclusive Right to Represent.’ These are the most common types of business broker agreement as they’re generally the least convoluted and have the best chance of creating a ‘win-win’ situation for both vendor (seller) and broker (representative).
What are they?
In a nutshell, signing an exclusive agreement means the broker (and their brokerage) effectively becomes your employee. They will work diligently and do all the leg work to target legitimate buyers, get written offers on the table, and ultimately sell and settle the whole transaction.
An exclusive agreement document will outline set fees as well as the commission structure of the transaction. By way of timeframes, the document will also outline the term of the contract, typically 30 days at a minimum, and anywhere up to 12 months at the other end of the scale.
Question, question, question
Every brokerage prepares their agreement document and terms with the full knowledge it can be challenged. As the vendor, you have the commodity to sell and you’re well and truly in the driver’s seat.
Use that position to your advantage and question the finer points of a broker’s exclusive agreement. A couple of points to remember…
- Question, challenge and above all, be aware of the exclusive term of your contract. There’s no valid reason for a broker (in this day and age) to require a 12-month exclusive contract. Signing this brand of contract is akin to wearing lead handcuffs. Chances are it’ll be slow, unproductive and once it’s in place, there’s nothing you can do but wait it out.
- Brokerages are third-party service suppliers, and any supplier worth their salt knows they need to continually deliver full service and ultimately, results, to keep their businesses ticking over. Take advantage of this position and test their ‘flex’.
- Commission can be negotiable. Some brokerages won’t negotiate their fees or commission, but in most cases, those fees are going to be more or less in-line with industry standards anyway. There’s no harm in having the discussion though, especially if you have a business you know they want or indeed need to sell.
Trust me, I’m a broker
It may come across a bit wishy-washy, but at the very heart of selling a business and entering into agreements is mutual trust. If you’re reading this, it’s likely the first time you’ve moved to sell a business, so finding a brokerage you know you can trust will be difficult.
That’s why understanding the agreement stage is so vital. Don’t afford a broker your un-tested, blanket trust, especially if you’ve never had dealings before. If they can’t trust you to keep them engaged whilst they are working diligently without a long-term exclusive contract, then you possibly cannot trust them to have your best interests at heart, and it may be best to give them a wide-berth.
You’ve likely got a pretty solid idea of what your business is worth already, especially if you’ve diligently sought prior advice from your accountant or financial advisor.
Use this knowledge when prospecting potential brokers and see if their appraisal is close to the mark. As covered in a previous AP Group blog, if a business is priced right (i.e. the gap between its ‘bankable value’ and the asking price is close), it shouldn’t take much longer than six to eight weeks to sell.
Entering an exclusive agreement to sell is a big step, but if it doesn’t go well, they can and will come to an end. A good agreement deal is one where the vendor has the ability to cleanly terminate at any point.
It may be the case that your circumstances have changed, and selling is longer an option, or you’ve simply changed you mind. The last thing you want is a legally binding agreement hovering over your head for months after parting ways. If you’ve done right by the broker and vice versa, the break should be clean, clinical and stress-free.
Here’s a quick recap:
- Search for a fair, short-term (30-60 days maximum) exclusive agreement;
- Negotiate (where possible) on fees and commission;
- Establish your trust boundaries and what ‘slack’ you’re prepared to give your broker;
- Understand the termination process before making any moves;
- Use your common sense. If it seems too good to be true, it usually is!
– Chris Swifte, National Business Development Manager at AP Group