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Should Website Brokers Be Paid On a Contingency Basis?
By Quiet Light
How trustworthy are the brokers who sell online businesses? I recently had a conversation with Dana Jaunzemis of 44ideas and asked for her unfiltered opinion. Here is her response:
For anyone considering exiting their business, statements like this from well-established, repeat buyers like Dana are concerning. Hiring an advisor should add value to the sale of your business, but for many sellers, hiring an advisor costs them value that they will never be able to recover.
Are Success Fee Payment Models To Blame?
If you hire a brokerage firm to sell your online business, you’ll likely agree to pay that firm on some sort of success fee: you only owe them a fee if they are successful in selling your business.
But does this set up an ethical issue for brokers? Does this work in the best interest of the person selling the business?
This article will examine the ethical issue of a success-based fee structure. Since Quiet Light Brokerage uses this model, I’ll also look at how we address this issue and how a seller can learn to identify if a potential broker for their business will act with their best interests in mind.
“The More Money You Make, The More Money I Make”
This is true: commission-based pay structures are highly effective at aligning a broke’s interest with your interest of selling your business. But this should be considered more carefully.
When you put your online business up for sale, you hold a valuable asset and the hope that this asset can be converted to cash. If, for some reason, you decide not to sell your business, you still own a valuable asset.
The broker, on the other hand, only benefits if you actually sell the business.
As a result, a broker could be motivated to pressure you into accepting a less than optimal deal just to ensure they get paid. Of course every broker would love to get paid more by getting you a better deal, but if the broker is faced with the option of “get paid” vs “don’t get paid”, a success-based commission model could pressure the broker to push you to accept a bad deal.
Fortunately, good firms (which I would gladly include Quiet Light and a handful of others) develop systems and approaches to remove this pressure.
So Should We Get Rid Of Success Fees?
I don’t think so. The benefits of commission based success fees still outweigh the possible drawbacks.
Goals Are Mostly Aligned
When a broker and a business owner enter into an agreement to sell an online business, both the broker and business owner have certain goals. The trick is to align those goals, and success based fees are successful at mostly aligning a seller and broker’s goals.
Alternatives to success fees, such as upfront fees or hourly fees, put the focus on different events which will hopefully result in a sale. For example, if a firm charges significant upfront fees for upfront due diligence and report generation, the focus of the firm will be on producing a great, glossy report which will hopefully sell the business. However, a success fee firm will also want to produce a great report.
Higher Value Sites Require More Skill
Generally speaking, higher value sites require more time and investment to sell, not to mention more skill. Success based commission fees do a good job of ensuring your business will get the proper attention it deserves.
Money Is a Factor
Although the binary nature of the broker’s payment (get paid vs. not get paid) may detract from the success fee model, the fact is, if a broker can get you more money, they most likely will since they will also benefit. So while the phrase “the more money you make, I make” might need an asterisk, it isn’t entirely untrue or misleading.
How We Address This Issue at Quiet Light Brokerage
None of these benefits answers the major question of this article, however: how can you prevent an advisor from giving bad advice just to ensure they get paid?
The answer is to look for a true professionalism, someone who knows that this business is a long-term proposition and that reputation is crucial to building a successful business.
But saying that you require professionalism and actually developing a true professional environment are two very different concepts. At Quiet Light, we’ve intentionally followed a few principles to help build what I believe to be a professional environment which will always put the client’s needs first:
We Are All Entrepreneurs
We make a big deal out of this point, but it is really important. Everyone who works at QLB has bought an online business, sold an online business, and started an online business. This practical experience allows us to understand the decisions our clients face and to respect the fact that the business being sold is theirs, not ours.
Our clients are the ones who put in the hard work to build something valuable, we exist to help them get it to the finish line. Our brokers often have relevant first-hand knowledge of when a deal is “good enough” vs. “walk away” based on their experience with their own businesses and the dozens they’ve sold for other clients.
We Are Financially Secure
A fast way to get a bad broker is to work with a desperate broker. Anyone who works at QLB must be financially secure enough not to be worried if they go through a slower period. It is difficult to offer objective advice when you are worried about how you will pay your bills. Our brokers do not have that concern.
Our Advisors Were Clients First
I made a point to only hire people that I’d worked with before in an actual buy/sell environment. When you go through the process of helping someone sell their business, or interacting with a buyer, you quickly learn whether that person goes about their business in an honest and professional manner.
As our advisors aren’t desperate for money, know the value of a reputation, and know what it is like to buy and sell an online business, it is easier for them not to get caught up in the fog of a success-based fee.
How You Can Determine If Your Broker Has Your Interests In Mind
Of course, Quiet Light isn’t the best fit for every business owner looking to sell their online business. While we have taken strong steps to ensure we act in our client’s best interests, not every firm does so.
So what should you look for in an advisor when selling? Here are eight telltale signs that a broker has your goals in mind:
They’ll Leave The Decision In Your Hands
A pushy, dishonest broker will push you into a decision. When I sold my business years ago, I can remember my broker pressuring me into decisions that I knew were not good decisions. While I didn’t mind a strong opinion, his actions went beyond offering a strong opinion.
A good broker will give you their opinion, but will respect your decision. There are a lot of decision points during your sale where you’ll want your broker’s opinion: your initial upfront valuation, evaluating offers, negotiation requests from your buyer, etc. A good broker should offer a well-informed decision, but recognize that you are the ultimate decision maker.
They’ll Give You Realistic Expectations
When you get an initial valuation or receive an offer, your broker should be able to give you realistic expectations. This means that they won’t be afraid to discuss with you the positives of your business as well as the negative points of your business, and to explain how the market will likely react to those factors.
Many dishonest brokerage firms will pump up your expectations about the marketplace, your business, and its value in the hope of getting you to sign. Then they’ll wait for the marketplace to lower your expectations as one low offer comes in after another.
Worse, if a business is over-priced initially, the listing often gets stale and buyers won’t even make a low offer; they’ll simply ignore the listing. In such a situation, the broker did the client a huge disservice to price the business too high initially.
They’ll Recognize The Value Of Their Own Time
When you hire a broker, you need to understand that you enter into a partnership. A good broker will be honest that they have their own motivations in working with you – they want to get paid.
Finding a good broker to hire should be a mutual vetting process in which you vet the broker while they decide if they want to work with your business as well. An honest broker won’t take on a business they don’t believe will sell.
They’ll Consider All Of Your Goals, Not Just Price
The value of your business typically dominates all other discussions when you look to hire a broker. But a good broker will also address your other goals: do you need a quick sale, what sort of terms are important to you, what are you doing after the sale, etc?
A broker who asks about your other goals is thinking about you first.
Doesn’t Always Make Self-Serving Recommendations
One of the surest sign that a broker is honest is if they make a recommendation that isn’t self-serving. For example, we tell roughly 50% of business owners who have quality businesses to wait 6 months or more before selling.
Why? Because we’ve usually identified a way for them to increase the value of their business. Sure, we get some benefit as well if those clients come back to us after that time, but we also run the risk of losing the client.
They Won’t Ask For An Eternal Exclusive Contract
Every reputable brokerage firm will require some exclusive period in which they get the opportunity to sell your business. Some firms, however, aim to lock up your business for needlessly extensive periods of time. A good firm will recognize that if they fail in finding a buyer for your business, you should be free to work with someone who may be a better fit.
Generally speaking, exclusive periods longer than 6 months tend to be excessive (although special considerations may be made for more complex businesses).
They Rely On Past Experience
Knowing and understanding the marketplace requires experience, and a broker can demonstrate that experience by sharing experiences that may be relevant to the sale of your business.
They Are Afraid Of Letting You Talk To Your Own Buyers
A lot of business owners have talks with potential buyers before they approach a professional intermediary. A good firm will encourage you to communicate with potential buyers before they sign you into an exclusive contract. However, it is not reasonable to expect to sign an exclusive contract with a broker, and have that broker “carve out” (i.e. waive their fee) for the buyers you’ve already encountered.
The reason is that the broker can bring many more buyers to the table, thereby putting pressure on your initial buyers to fish or cut bait. That has value. So if you believe you have found a buyer on your own, try to close the deal before you hire a broker.
If you work with someone who is honest, takes pride in their work, and understands the power of developing a great reputation, how they get paid won’t influence the level of professionalism they commit to selling a business.
Some firms try to change their financial motivation by charging clients upfront for their work, or charging on an hourly basis, but both of these models can be abused just as easily (and maybe more easily) than a success-based fee.
Success-based fees, while not perfect, do the best job of motivating a broker to get you the best deal possible. But short-sighted advisors can still abuse this motivation. The answer, in my opinion, is professionalism and holding the members of your firm to high standards of ethics.
What are your thoughts? Is there a payment model that would be more effective in weeding out dishonest brokerage firms? What other traits do you look for to ensure your broker has your best interests in mind?