By Karl Edmunds – Director, SDR Ventures
The end game is upon you and you are diligently trying to find just the right exit advisory firm to represent you in the sale of your business. Your two finalists preach similar success stories and firm capabilities but one proposes a “success fee only” while the other proposes a monthly retainer along with a success fee that is payable upon closing.
Now what? How, and in what ways, should different fee structures play a role in how you choose an exit advisory firm?
If you pick an advisory firm that proposes the highest fee, thinking “you get what you pay for,” but it turns out that hidden behind that high fee is a low quality firm, your chances are slim that you will celebrate a successful sale. You may face a similar unsuccessful result if you opt for the firm that proposed a lower fee and it turns out that such firm also is in fact lower quality.
My advice: First spend time evaluating the substantive quality of prospective exit advisory firms and then evaluate the fees quoted by each. The outcome of actually selling your business on terms that are favorable and acceptable to you is ultimately what matters most.
Some of the critical substantive quality attributes to evaluate in potential exit advisory firms are:
- Length of time in business coupled with number of transactions completed and closing track record;
- Formal complaints or litigation (or absence thereof) due to performance;
- Industry experience combined with a proven “go-to-market” process;
- Geographic coverage and relationships;
- Operates with integrity and delivers what is promised.
After a high-quality exit advisor is identified, its fee structure can be considered in detail. Too often, business owners will spend hours negotiating minor fee differences that have little influence on whether the business actually gets sold in a way that is satisfactory to the business owner. So let’s focus on the big picture regarding fee structure issues.
Some business owners will argue that a pure performance-based (i.e. success fee only) fee model is best in all cases. “I will pay if, and only if, the sale actually closes!” To some extent, this makes perfect sense. But are there weaknesses or risks with this type of fee structure? The answer is YES!
Let’s assume that you are a business owner with a nice $25MM company for sale and that you hire an exit advisory firm with a success fee only structure. When you evaluate this structure, be attuned to the following factors that can and often do impact or influence the deal.
One of the biggest problems with a purely performance-based fee structure is that it may drive the pace and direction of the deal discussions toward the self-interest of the exit advisory firm rather than the best possible deal for the business owner/seller.
How does this happen?
With a performance-only fee arrangement, the exit advisor may be motivated (consciously or unconsciously) to swiftly find an interested buyer and then try to convince the seller (i.e. the exit advisor’s client) that the proposed deal is “the best available in the current marketplace” and to close in the shortest time possible. When the profitability of the transaction for the exit advisor declines with time, urgency to close may favor the exit advisor at the expense of the business seller.
In addition, with a performance-only fee structure the exit advisor may lack motivation to extend the negotiations and help the seller drive a “hard bargain” for the most favorable terms and conditions. Again, the time factor can be critical.
Does this happen with every transaction involving a performance-only fee structure? Of course not.
For smaller business sales, a performance-only fee structure is more common because large amounts of time and energy may not be necessary to competently prepare the business for the marketplace. Also, many smaller businesses can be sold without the extensive involvement of the exit advisor’s human resources, which reduces the financial and deal risk for the exit advisory firm. Smaller and/or more limited capacity advisors may be especially suitable for these types of deals.
In contrast, for sales transactions with greater complexity, extensive pre-market preparation needs and a lengthy anticipated in-market process, the business owner usually benefits from retaining an exit advisor via a traditional monthly retainer and success fee payable upon completion of the deal.
In the end, even while acknowledging an exit advisor’s potential conflicts of interest that may come from a performance-only fee structure, some business owners nevertheless may choose this structure because they lack cash flow to pay a monthly retainer. Preparing in advance for the fees needed to sell your business is therefore a critical planning component.
In summary, I suggest the following: don’t go to market seeking what may be your greatest payday from years of hard work and sacrifice without understanding clearly how fee structures for your exit advisory firm can influence the outcome of a deal – positively or negatively. Make sure that your desires and expectations for the best possible price and deal structure are aligned with the fee structure and motivations of the exit advisory firm that you retain to sell your business.