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Business Broker Versus Merger and Acquisition Advisor - The Monthly Fee Objection

By: Dave Kauppi

Probably the biggest objection that we get from potential business sellers is, "I'm not going to pay you a monthly fee only a success fee when you sell my business." These business owners have met with business brokers that do not charge a monthly fee and believe that a Merger and Acquisition Advisory Firm should agree to the same pricing structure.

For many types of businesses I would agree that a seller should hire a business broker and not pay a monthly fee. If that business is a smaller "Main Street" business like a dry cleaner, gas station, convenience store, restaurant, or other business to consumer organization, a business broker will be fine. They generally are selling these businesses to individual buyers and not to corporations. A very important point, an individual buyer will never pay strategic value for a business. He is buying a job. The Main Street business sells for a rule of thumb financial multiple.

For business brokers the selling approach is more passive than the approach of a M&A Advisor because a BB has to have a large number of transactions going at one time. He is therefore limited in the time he can devote to each contingent engagement. Their selling approach is often comprised of putting the listing on a business for sale Web Site, placing a business opportunity ad in the Sunday paper, and sending a mass email to their accumulated list of individual buyers.

A business that is business to business or B2B is more likely to be acquired by a corporate buyer. Reaching these buyers is far more difficult and far more labor intensive. Mailings are no longer effective, email does not work, business for sale Web Sites are not visited. The method that works is the old fashioned dialing for dollars approach. Reaching the targeted decision maker takes an average of ten phone dials.

When you do get through, you have about 30 seconds to articulate the opportunity and establish your credibility. The M&A firm's objective is to interest multiple strategic corporate buyers and get a competition going. That can result in some very lucrative exits for their business owner clients.

Another common objection that we hear from business owners about the monthly fee is, "We want you to have skin in the game. If you get the business sold and we win then you win." At the lower end of the middle market the monthly fees are normally in the $5,000 to $10,000 per month range. The M&A firm will be performing $15,000 to $25,000 of work if it were to bill the client hourly. The M&A firm, on this basis, usually has as much skin in the game as the business owner incurring the monthly fee. If the M&A firm does not complete the sale, they lose money on the engagement.

Conclusions The deciding factor is in cost benefit. An M&A firm is going to cost a lot of money and you are going to be paying either an up front or monthly fees without a guarantee of success. If your business is smaller and is a commodity type business or Main Street business where the target buyer is an individual, an M&A firm will not add much value and is not worth the fee.

If your business is larger, complex, unusual, strategic, with a high component of intellectual property or technology and subject to a broad interpretation of value in the marketplace, an M&A firm is the right choice. In the final analysis, is a swing of 20% in your company's selling price worth $5,000 per month for 8 months?

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href="http://www.midmarkcap.com/SellerResources.cfm" target="_blank">Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, representing owners in the sale of privately held businesses. We provide Wall Street style investment banking services to lower mid market companies at a size appropriate fee structure.

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