If you’re a business owner and you’re thinking of selling your company, exclusivity is a term you should know. You’re likely familiar with the concept in real estate, when you sign a contract with a realtor to sell your house: Even if a buyer contacts you directly, you’re legally bound to compensate the realtor as part of the deal.
Exclusivity works the same when you’re selling a business. When you sign an exclusivity deal with a business broker or another company, you’re locked into an agreed upon time period. However, there are some significant differences between exclusivity regarding companies versus a broker.
Two Types of Exclusivity for Sellers
There are two types of exclusivity for selling your business. The first type is between you and a broker. It typically includes a yearlong period, during which time the broker will market and sell your business. There is also a period called the “tail,” which we will get to in a bit.
You can also enter into an exclusive negotiation period with another company. This is an indicator to both sides that you believe a zone of possible agreement (ZOPA) exists. The ZOPA is an acknowledgement from each party that they’re committed to the deal. It’s the proverbial light at the end of the tunnel.
Either type of exclusivity lessens your ability to entertain other offers from other buyers. As a seller, it may put you at a disadvantage. If you’re locked into an exclusivity agreement, you can’t entertain other offers. That’s why the time element of any exclusivity deal is crucial.
Time is of the Essence
In many ways, exclusivity is like getting engaged and setting a date for the wedding. You have between now and the deadline date to seal the deal. That type of deadline creates a sense of urgency and really gets the ball rolling.
The longer you wait, the greater the chances that the deal could fall apart. What if you lose five big clients next month and your profits decline? What if the stock market crashes? Your buyer could get cold feet. You could get cold feet.
It’s why the ideal state in an exclusivity date with another company is 30 days. It allows you both to focus on getting the deal done, but doesn’t rule out other potential buyers who are waiting in the wings.
The Tale of the “Tail”
In the case of the length of an exclusivity deal with a broker, you have to be careful. Time in these types of contracts is definitely not on your side. Most people sign a one-year exclusivity deal with a broker. That’s pretty standard.
But what you may not know is that many exclusivity deals require what’s called a “tail.” This ensures that beyond the initial 12 months, any deals that close for the next two years still result in the broker getting a commission.
That sounds pretty ridiculous, right? But I see it happening every day.
How the “Tail” Wags the Dog
Let’s delve into the “tail” a little more, because it’s one of those Wall Street maneuvers that leaves Main Street so disgusted.
Okay, you’ve signed an exclusivity deal with a broker – let’s use a one-year period as an example. Likely there is a fee involved for the time the broker will spend marketing the deal and looking for buyers, so you may be looking at approximately $75,000 in fees (all dependent on the size of your business.)
Note that the $75,000 in this example is the upfront fee. It’s separate from the commission on the sale of your business. Make sure you are compensating a broker who works hard and gets the deal done.
Because what happens if you align yourself with someone who does little or nothing? After 12 months, you have no opportunities, no momentum and you’re out $75,000.
Then the tail kicks in. While you move on to Broker B, your original broker is still entitled to fees for the next two years if you close. He’s got you coming and going, as they say.
How to Ensure You’re the Alpha Dog
Part of me is hesitant to write about topics like this, because I feel like it makes owners too fearful to sell their businesses and work with a broker – or anyone, for that matter.
But if you wait too long because you’re fearful of the next step, you could lose any chance to sell for maximum profits. Don’t live that way. You can remain the alpha dog in a deal with a few simple protective measures:
1. Build a team – and it doesn’t have to include a broker. Understand that you don’t necessarily even need to go with a broker or M&A advisor in the first place. I’ve seen plenty of sellers just use a team of financial experts, and then bring in an attorney for the closing.
In other cases, a broker may be needed. Whatever path you choose, build a team with the end-goal in mind. How much do you want to make from the sale of your business? You may need an estate planner on board first and then build a transition team from there. It can consist of a tax advisor, a lawyer, and yes, even a broker.
2. Conduct due diligence on the broker. If you do enlist a broker or M&A advisor, proceed with caution. You’re about to enter into the biggest deal of your life, and you’re going to rely on a broker to engineer it. So, make sure you’re very, very comfortable with the person. Get references, talk to previous customers, make sure they’ve never been sued – approach it like you would any business deal.
3. Find someone industry-specific. You don’t have to worry about the tail if you’re working with someone who knows the industry and is well connected. They’ll find the right people to make the deal happen. So, make sure your broker knows the industry and its people inside and out.
4. Negotiate, negotiate, negotiate. Everything I’ve touched on in this article is negotiable, so be sure to negotiate any of the terms you find unacceptable. Don’t want to deal with the tail? Then don’t. Everything is negotiable.
Once again, let me make it clear that I am not against exclusivity, and I’m not disparaging brokers. I am, however, warning you to be careful about those who will use the tool for their own benefit, and not yours.
Do your own due diligence and enter into any type of contract wisely. And if you find someone pushing an exclusivity package with a poor track record and a tail a mile long, tell them they’re barking up the wrong tree.
Rock LaManna, President and CEO of LaManna Alliance, helps printing owners and CEOs use their company financials to prioritize and choose the proper strategic path. Rock can be reached by email at email@example.com.