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Business brokers: six engagement letter clauses to read before signing
Business brokers' engagement letters taken apart: six clauses, how each follows the deal structure, who pays whom, and the costs no invoice ever shows.
An intermediary's fee looks like one number. In the engagement letters business brokers send, it is actually six clauses, each with its own trigger: the success fee, the fee base, the retainer, the minimum fee, expenses and the tail. Two engagements quoted at the same rate can cost very different amounts depending on what the fee is measured on, when it is earned, and how long it survives the engagement.
This page takes the fee apart into those components, shows how each interacts with the way the deal is built, and sets out the costs that never appear on the invoice at all. It gives no market rates: rates are negotiated deal by deal, and what decides the bill is how these clauses are drafted.
What to take away
- Ask what the fee is measured on before you ask what the rate is. The base moves the cost more than the rate does.
- The fee is a claim on the price, so every structure that defers or conditions the price raises the question of whether the fee follows it.
- The costs that are not fees, a stale listing, a broken confidentiality, a failed process, are the ones that decide whether the engagement was expensive.
The components
| Component | When it is owed | What to establish |
|---|---|---|
| Success fee | On completion, or earlier if the letter says so | The trigger: completion, accepted offer, or signed letter of intent |
| Fee base | Calculated on the price | Whether the base is cash at closing or the headline including deferred amounts, earn-outs, seller notes and assumed liabilities |
| Retainer | Monthly or up front, regardless of outcome | Whether it is credited against the success fee |
| Minimum fee | If the price is below a level | Whether it applies even to a sale you found yourself |
| Expenses | As incurred | What is included, what is billed separately, and whether there is a cap |
| Tail | After the engagement ends | How long, and whether it is limited to a written register of introduced buyers |
What protective wording looks like, clause by clause, as drafting you can ask for rather than a standard form:
- Success fee:"The Success Fee is earned only on completion of a sale to a buyer introduced during the Term."
- Fee base:"The Success Fee is calculated on consideration actually received by the Seller and is payable as and when it is received."
- Retainer:"Retainer payments are credited in full against any Success Fee."
- Minimum fee:"The Minimum Fee does not apply to a sale to a buyer introduced by the Seller."
- Expenses:"Expenses above the agreed cap require the Seller's prior written approval."
- Tail:"The Tail applies only to buyers named on a written register delivered to the Seller when the engagement ends."
Three clauses outside the fee decide almost as much: whether the engagement is exclusive, how long the term runs, and how either side can terminate it. Read them with the fee, because the tail and the minimum fee usually refer back to them.
The success fee is a contingent fee: the intermediary is paid for an outcome rather than for time, which is why they are motivated to reach one. Everything else in the table exists to protect them against that outcome not arriving. Each of those protections shifts cost to you when it does not.
Broker fee components to verify
- Success feetrigger on completion or earlier
- Fee basecash at closing or headline price
- Retainercredited against success fee?
- Minimum feeapplies even to your own buyer?
- Expensesincluded, separate, or capped?
- Tailduration and written buyer register
How the fee follows the structure
This is where the real money moves. A fee measured on the headline price, payable at closing, means that on a deal with a large deferred element you pay the intermediary in cash for money you have not received and may never receive.
Does the fee apply to this element?
Deferred consideration: fee at closing or as paid?
you pay cash before receiving it
fee follows your receipts
Take each element of a deal structure in turn and ask the same question: does the fee apply to it, and when?
- Deferred consideration. Is the fee on it payable at closing, or as you are paid?
- Earn-outs. Is the fee on the maximum, on what is actually earned, or on nothing until it is earned?
- Seller financing. Is a loan you have made to the buyer part of the base, and is the fee on it due before the buyer has repaid a cent?
- Assumed liabilities. If the buyer takes on debt as part of the price, is that counted as consideration?
- Property, vehicles or the trading name kept by you. Excluded, or counted because they were in the original listing?
- Consulting or transition agreements. Payment for your time after the sale, or disguised price? Some engagement letters treat them as price.
The engagement letter decides all of this, and the clauses are described on the main intermediaries page. Read them against the structures you are prepared to accept. A seller who expects a clean cash sale and ends up with a staged one will find that the fee was drafted for the first and charged on the second.
Who pays
Conventionally the seller pays because the seller engages the intermediary; variations exist. A buy-side adviser is engaged and paid by the buyer. One intermediary acting for both, with disclosure, may be paid by one side or split, and a finder may be paid by whichever side agreed to pay them.
Who pays whom in the room
Seller side
- Engaged by
- Seller
- Paid by
- Seller
- Fee inside price
- Yes
- Advice is for
- Seller
Buyer side
- Engaged by
- Buyer
- Paid by
- Buyer
- Fee inside price
- No
- Advice is for
- Buyer
Dual or finder
- Engaged by
- Either side
- Paid by
- One or split
- Fee inside price
- Depends
- Advice is for
- Disclosed both
In every case, at the first meeting, establish who pays each person in the room; this changes what their advice is for.
A buyer should assume the seller's intermediary fee sits inside the asking price. The seller set that price knowing the fee comes off the top.
That is no reason to discount. It is a reason to learn what preparation produced the asking figure. To see what the seller actually fixed, start with the seller preparation checklist, split between owner, accountant, lawyer and intermediary.
The costs that never reach an invoice
A stale listing. A business marketed at the wrong price, or before it was ready, becomes a business the market has seen and passed over. The second attempt, months later, starts from that. No fee is charged for it and it can cost more than any fee.
Invisible costs versus invoiced fee
Never invoiced
- Stale listing
- Market has passed
- Broken confidentiality
- Shows in trading figures
- Failed process
- Retainer, legal, drift
- Wrong buyer
- Deferred portion argued
Invoiced
- Stale listing
- No fee charged
- Broken confidentiality
- No fee charged
- Failed process
- Retainer paid
- Wrong buyer
- Fee earned at closing
A broken confidentiality. Staff, customers or suppliers learning of the sale before the buyer is committed. An intermediary who runs a loose process costs you this, and it shows up in the trading figures the buyer is examining.
A failed process. A deal that collapses during diligence, after months of the owner's attention, leaves a retainer paid, legal and accounting fees incurred, and a business that has drifted. The engagement letter should say what is owed if nothing completes; the answer is part of the price of engaging.
The wrong buyer. A quick completion with a buyer who cannot run the business and returns to argue about the deferred portion. The intermediary's fee was earned at closing. Yours is still being collected; see closing and what follows it.
How the fee is treated afterwards
Tax treatment of the costs of selling a business, including the intermediary's fee, depends on structure, what was sold, and changing rules. Your accountant must address that in the modeling before you agree on a price.
The IRS has an orientation page on the sale of a business describing the general framework. Its starting point matters for the fee discussion: a sale of a trade or business for a lump sum is considered a sale of each individual asset, and both buyer and seller must use the residual method to allocate the consideration to each asset, which decides how much is goodwill. Both sides report that allocation to the IRS on Form 8594, Asset Acquisition Statement. It is not advice about your specific sale.
A sale of this size warrants an intermediary, an accountant and a lawyer. The intermediary's fee is the visible one. The other two are what stop the invisible costs on this page from becoming the largest.
