Once you've decided to sell, one of the first choices is whether to pay someone to find a buyer and run the sale. A good broker can save you a great deal of time and reach buyers you couldn't. You'll also be signing a contract that can outlast the sale itself, so it's worth knowing what's in it before you do.
This guide describes what brokers and corporate finance advisers do and how they're paid. It then goes through the engagement letter, and the cases where selling privately makes more sense.
Brokers and corporate finance advisers
The names overlap. Business brokers, sometimes called business transfer agents, often work with smaller businesses and may advertise them on listing sites, much as an estate agent markets a house. Corporate finance advisers tend to work on larger sales, approach a chosen list of buyers and do more of the negotiating. Some firms do both.
What matters more than the label is what they'll do for you, and whether they've sold businesses like yours before. A specialist in one sector may know the buyers in it well and have little to offer in another.
What a broker or adviser does
- Values the business and advises on the price and the timing.
- Prepares an anonymous summary to test interest, then fuller information for serious buyers.
- Finds and approaches buyers, and checks they can pay.
- Manages confidentiality agreements and controls who sees what.
- Negotiates offers and heads of terms on your behalf.
- Keeps due diligence and the lawyers moving through to completion.
They don't replace your accountant or your solicitor. You'll still need both, and a tax adviser if your accountant doesn't cover the tax on a sale. And although the broker writes the sale information, it goes out about your business, so check every figure in it before a buyer sees it.
How brokers and advisers are paid
Fees are built from some mix of the parts below. Which ones a firm uses, and in what balance, is the first thing to compare.
- An upfront fee when you sign, often described as covering valuation and marketing.
- A monthly retainer while the business is being marketed.
- A success fee when the sale completes, usually worked out from the price, sometimes with a minimum.
- Hourly or fixed fees for particular work, such as a valuation on its own.
- Expenses, and VAT on top of the fees.
An upfront fee is paid whether or not a buyer is found. Ask what it buys, and whether it's taken off the success fee if the sale goes ahead. A firm paid mainly on success has more reason to get a deal done, which is good, though it's also a reason to keep your own view of whether the deal on the table is right for you.
Ask who else pays them. If a broker would also be paid by the buyer, you need to know before you rely on their advice on price.
What to check in the engagement letter
Exclusivity
An engagement letter will often make the firm your only adviser for a fixed period. The exact wording decides when you owe a fee. Two terms that estate agents must explain to their clients in a set form show the difference.
- Sole agency. You pay if you sell to a buyer the agent introduced, or one introduced by another agent, during the agency. You don't pay if you find the buyer yourself.
- Sole selling rights. You pay if a sale is agreed during the period even if you found the buyer yourself, and after it ends if you sell to a buyer introduced or negotiated with during it.
Work out which of these your letter amounts to, whatever it calls itself. Agree how long the exclusive period lasts, and that you can end it early if the business isn't being actively marketed. If buyers have already approached you, list them in the letter and agree whether a fee is due if one of them buys.
If the sale includes an interest in land, such as the lease of your premises or a freehold, the broker's work may count as estate agency work under the Estate Agents Act 1979. HMRC uses the same definition when it lists business brokers and transfer agents among the estate agency businesses it supervises. Where the Act applies, the broker must tell you in writing, before you're committed, when you'll owe them and how much, and explain terms like these in the wording the regulations set out. If they don't, they can't enforce the contract against you without a court order.
How long it lasts and how to end it
Check the minimum term, whether it renews automatically and how much notice you must give to end it. Agree what happens to any fee already paid if you end it, including if the firm hasn't done what it promised.
The tail period
A tail clause means you still owe the success fee if you sell after the agreement ends, to a buyer the firm introduced or dealt with while it ran. That's fair in principle, because it stops an owner using a broker's work and then ending the agreement to save the fee. The detail is where to push.
- How long the tail lasts after the agreement ends.
- What counts as an introduction. A buyer the firm has named to you in writing is clearer than anyone who saw an advert.
- A written list of introduced buyers when the agreement ends, so the tail covers only them.
What the success fee is charged on
- Whether it's charged on the headline price, or only on money you receive.
- When it's paid. A fee on deferred or earn-out money that's due at completion means paying out before you've been paid, and possibly on money you never receive.
- Whether it applies to a sale of part, a later sale of the rest, or property let to the buyer.
- Whether there's a minimum fee, and how it works if the price is lower than hoped.
- Whether you owe anything if you pull out after a buyer has agreed terms. Estate agency terms call this a ready, willing and able purchaser clause, and it can make a fee due even though no sale happens.
Checks on the firm
- Ask for references from owners whose businesses they've sold, ideally in your sector.
- Ask who will do the work day to day, and how they'll keep the sale confidential.
- HMRC lists business brokers and transfer agents among the businesses that must register for money laundering supervision, and publishes a register you can check. Expect the broker to check your identity too.
- If they'll arrange a sale of shares, ask whether they're authorised by the FCA, or which exclusion they rely on. There's an exclusion where the shares sold carry at least half the votes, so a firm selling all of your company may not need to be. The FCA's register shows who is authorised.
When selling privately makes sense
You don't have to use a broker. A private sale tends to suit these cases.
- A buyer has already approached you, such as a competitor, a supplier or an investor.
- You want to sell to your own managers through a management buyout, or to your staff through an employee ownership trust.
- You'd rather keep the circle very small, for the sake of your staff and customers.
- The business is small enough that the fees would take a large part of what you receive.
The risk with a single buyer is that there's nobody to compare their offer against. A valuation from your accountant helps, and our valuation tool gives a first rough range in a few minutes. You can also pay an adviser by the hour, or a fixed fee, to value the business and help you negotiate, without a success fee.
Either way, you'll need an accountant and a solicitor who does company sales, and you'll do more of the running yourself. Our checklist for selling your business sets out the steps in order, and it's worth reading the heads of terms and the sale agreement as closely as you would with a broker alongside you.