Q: I want to buy a business that manufactures accessories for trucks/SUV’s in the $2-10 Million revenue range. Have not had much luck approaching potential companies that are not on the market. A business buyer representative says he can do this, but charges an upfront fee. I understand the need to do this as he says he will not take on an assignment without a client commitment. Minimum is $5,000 and goes up according to price of acquisition with a success fee as well. Any thoughts on doing this?
A: I have several specific opinions on your questions.
First, I can certainly understand any intermediary requiring upfront money to perform this function.
It requires a significant investment of time and money for them to collate the list, solicit the businesses, qualify potential prospects, arrange visits, and put the deal together.
Keep in mind, that they can do all of this and should you change your mind about buying a business, they are no further ahead. In fact, it has cost them a lot of money. As such, paying them a fee for the solicitation portion of this service is justified, and $5,000 is not out of line compared to similar companies. What I do not agree with is a tiered fee structure for the solicitation portion dependent upon the deal size. It does not cost them any more or less to solicit a $2 million company than it does a $10 million one.
On the other hand, I am always concerned about what they will deliver if anything at all. You have two financial obligations to this process. The solicitation cost, and then the success fee. It is clear what they are expected to do for the solicitation part, but then what? Are they YOUR advisor? You need to clearly understand what their role may be and also to be absolutely certain that they are only compensated by you. Conversely, if you do not feel that they can contribute to helping you negotiate a better deal, or putting the deal together, then you need to discuss this with them and arrange a lower success fee, or perhaps just a higher fee for locating the business.
In my experience, these arrangements turn sour because the buyer has unrealistic expectations about what the “advisor” will deliver. That’s why it critical that you do the following:
Document precisely what they will be doing to earn all of their fees and the time in which they will do it (i.e. 4 weeks to put together the target list, prepare the letters; follow with phone calls, etc.).
- Have them provide you with several references and contact information of people whom they have worked for in a similar capacity. These individuals will surely be able to shed light on their performance, good or bad.
- Lastly, you need a documented mechanism to terminate the relationship if they are not delivering upon what they have agreed to do.
When all is said and done, given that you’re looking at a business in the $2-$10 million range, should they be able to find you the right business, and help you negotiate and close the deal, then their fees are probably insignificant relative to the business you will own.