Business broker engagement patterns: six invented engagements and what each one teaches

Every engagement below is invented. No real intermediary, owner, buyer or firm is described. The rules, providers, and figures that follow are real, and each lesson is a pattern that repeats regardless of size.

Six patterns appear, each shown as it first appears to the owner, then as it looks once the engagement has run its course, then what is worth studying in it.

What to take away

One: the highest number

As it appeared. Three intermediaries pitched. Two gave a range and a list of things they would want fixed. The third gave a single figure, well above the others, and won the engagement.

As it played out. The business went to market at that figure. Enquiries came, packages went out, and every buyer's accountant came back to roughly where the other two intermediaries had started. After some months the price was reduced, by which time the market had seen the business and passed on it once.

The third intermediary's figure was a broker's opinion of value, not a USPAP appraisal.

What to study. An opinion of value produced to win a listing is subject to the ordinary overconfidence effect, amplified by the fact that the confident answer wins. The two intermediaries who lost had told the owner what a buyer would say. The one who won had told the owner what the owner wanted to hear. The main page on intermediaries explains why this happens; the pattern here is what it costs.

Real-world reference: the IBBA awards the Certified Business Intermediary (CBI) designation. USPAP requires support for an appraisal opinion. For Main Street businesses, broker commissions commonly run a typical range of 8 percent to 12 percent of the sale price, often with a minimum fee.

Two: the tail that bit

As it appeared. An engagement that produced few enquiries. The owner ended it at the end of the term and, a while later, sold the business to a local competitor who had approached them directly.

As it played out. The intermediary claimed a full fee. The engagement letter's tail clause covered any buyer "introduced or made aware of the business" during the term, with no written list, and the intermediary's marketing had, they said, reached the competitor.

The dispute went to arbitration administered by the American Arbitration Association (AAA).

What to study. The clause was in the letter from the start, and the owner had signed it without a lawyer. A tail limited to a written register of introduced buyers, delivered when the engagement ends, would have settled the question in a sentence. Without one, it was settled in arbitration, at a cost that made the fee look small.

Real-world reference: the American Arbitration Association (AAA) and JAMS administer business arbitrations. Tail clauses commonly run a typical range of 12 months to 24 months. A written buyer register delivered at the end of the engagement is a standard risk control.

Three: both sides of the table

As it appeared. The intermediary produced a buyer quickly. The buyer was well funded, moved fast, and did not haggle much on the headline.

As it played out. The buyer was a client of the same firm on the buy side, which had not been disclosed. The structure the buyer proposed was heavy on deferred consideration, and the intermediary, who was paid on the headline at closing, encouraged the owner to accept it.

The IBBA code of ethics requires written disclosure of such conflicts, and combined commissions on Main Street commonly run a typical range of 8 percent to 12 percent.

What to study. Whether an intermediary may act for both parties is a matter of jurisdiction and contract; whether they should tell you is not. Ask at the first meeting and require the answer in the engagement letter. Then read any proposed structure knowing whose fee it serves.

Real-world reference: state law governs business broker dual agency. Some states require a real estate license for business brokerage, others do not. The IBBA code of ethics requires written disclosure of conflicts. The SEC and FINRA rules govern securities broker-dealers, not most Main Street asset sales.

Four: the process that worked

As it appeared. An intermediary who insisted the business was not ready and sent the owner away for a year with a list.

As it played out. The owner reconciled the accounts, documented the operation, and renewed the lease. The intermediary then marketed the business anonymously, qualified every buyer on funds before releasing a package, and brought three offers to a single deadline. The offers were close to one another, and the owner chose on structure rather than headline.

The buyer ultimately used an SBA 7(a) loan. The program guarantees up to 85 percent of loans up to $150,000 and 75 percent above that.

What to study. Nothing dramatic happened, which is the point. Competitive tension came from the process, not from bluffing, and the offers clustered because every buyer had seen the same clean record. This is what the fee is for. The preparation list the intermediary handed over is, in outline, the seller preparation year.

Real-world reference: BizBuySell publishes an annual Insight Report with median asking prices and sale prices. SCORE and SBA Small Business Development Centers provide free or low-cost preparation help. SBA 7(a) loans are a common acquisition financing tool for Main Street deals.

Five: the intermediary who wanted to draft the contract

As it appeared. A helpful intermediary who offered to save the owner legal fees by preparing the sale agreement from a template they had used many times.

As it played out. The agreement contained warranties the owner did not understand, no cap on their liability, and an earn-out with no accounting policies fixed. The buyer's lawyer had read it. The owner's had not existed.

The agreement had not been reviewed under the ABA Model Rules on unauthorized practice of law.

What to study. An intermediary is not a lawyer and is not liable as one. A template that has been used many times has been used many times on the other side's terms as often as on yours. The parts of a sale that belong to the lawyer, the contract above all, cannot be delegated to the person whose fee depends on it being signed.

Real-world reference: the American Bar Association (ABA) Model Rules and state bar associations govern unauthorized practice of law. IRS Form 8594 allocates purchase price among asset classes. Typical legal fees for a Main Street asset sale can run a labelled range of $5,000 to $25,000, depending on complexity.

Six: the owner who went alone

As it appeared. A buyer approached directly. The owner, reasoning that a fee was unnecessary when the buyer was already in the room, negotiated alone.

As it played out. There was one buyer, and the buyer knew it. Every request for information was met, every point of price moved one way, and at the end the owner accepted terms that a second offer would have improved. There was no second offer, because nobody had gone to find one.

The buyer used seller financing and an SBA 7(a) loan. Both are common Main Street deal structures.

What to study. An intermediary's fee buys, above all, the second buyer. When a buyer arrives unbidden, the question is not whether to pay a fee but whether you can create competition without one. Sometimes you can. This owner could not, and the diligence that followed was run entirely on the buyer's terms because there was nobody on the seller's side to set any.

Real-world reference: the IBBA and M&A Source maintain member directories of business intermediaries. The SBA 7(a) program and seller financing are common deal structures. Typical intermediary fees on Main Street run a labelled range of 8 percent to 12 percent, often with a minimum fee.

Common questions