Selling your company, after a lifetime of work or a few short years, is an exciting time. Unless you have a buyer, you may need to hire a business broker to identify the right buyer. A broker can add significant value to a transaction, but it’s important to make sure you both have the same expectations. An experienced lawyer can help you understand the potential consequences of the Broker’s engagement letter.

The seller should understand:

• The broker’s fee is usually based on a percentage of the total sale compensation. Compensation is sometimes defined as “transaction value.” It’s important to understand, this is broader than just the cash payment and may include the value of debt assumed by the buyer, amounts paid under employment/consulting agreements, and the value of real property or payments made pursuant to a lease for real property.
• Contingent payment obligations of the buyer (including earn-outs, payments or holdbacks released by the buyer after closing) are typically included in the transaction value for purposes of determining the broker’s fee. If the broker’s fee includes the value of contingent payments, and the contingent payment is not made, you have paid a fee for value you did not receive.
• The “tail” provision (where you pay the broker’s fee if a sale occurs after the engagement letter expires) can run from 6 months to multiple years, and may cover only buyers introduced by the broker, or any buyer during the tail period. In addition, not realizing a second fee may be due to a former broker after the expiration of an engagement letter could cause problems with a future sale particularly if another broker is involved.

The above issues, as well as many more arising in engagement letters with brokers, are excellent reasons to get your lawyer involved early.