To Fee or Not to Fee

To Fee or Not to Fee

My staff and I have worked hard to reach the high levels of competency we have achieved. Between educational and vocational awards, designations and battlefield tested skills we have the scars and medals shared by many of our contemporaries in this occupation we share. Whether it’s practicing as brokers on main street, intermediaries in M&A, valuations for divorce, shareholder actions, estate matters, potential sale, etc., buy-side engagements or arranging financing so that our clients maximize their life dream, we all strive for excellency.

So why do so many in our industry perform for free, sans fee?

We charge potential clients an upfront fee for a strategic options valuation before being engaged to represent the sale of the company. We ask buyers to pay a retainer if they want us to represent them in a business search. We charge a fee to aid a buyer in securing financing and credit back to the buyer if we’re paid an origination fee by the lender.

Sure, it’s argued that we should work on a success fee basis like real estate brokers. They do a comparative market analysis for free and then hope they will get the listing and eventually get the property sold. Many business brokers/intermediaries do an evaluation for free with the hopes of getting the listing. Even if all we had to do was pull BizComps and Pratt’s Stats and present same in a 2-page report, chances are we’d still have 2 to 4 hours of work invested. I’m constantly amazed when I hear of a contemporary in another office working for free. Even if you do not have valuation credentials, are you not more qualified than most to offer an expert opinion of value?

How about the agent with a purported buyer who drives them around to see every potential business for sale within 25 miles of the office? Wouldn’t we be better off by charging the buyer a buy-side retainer and bill against it at an hourly or flat fee? We charge a success fee upon successful conveyance. Our success fee to the buyer is a percentage of the savings from the asking or appraised price. Our remuneration is rarely challenged as the buyer typically comes out with a great ROI and the seller wouldn’t accept the offer it didn’t meet their needs.

Mailings – ever notice how a potential seller reacts when they’re told the buyer is paying the fee? We can send ten marketing letters to a seller as sell-side brokers with no response. We send one letter  to the same seller stating that the buyer pays our fee and the phone rings right away. Hmmm.

Business appraisals are complex vehicles that have a profound impact on the end user. Are we really that comfortable with Rules of Thumb when we advise a seller of the value of their life’s achievement using this valuation metric? Do Rules of Thumb/Dumb models work when every business is different? Even canned software isn’t much better than taking the seller’s opinion on a 1 to 10 scale and plugging in some numbers with questionable veracity. Perhaps the “no fee” approach creates a false sense of security that mitigates the risk if we over or under value the business. Wrong! I hope your E&O insurance is paid. As professional business brokers and intermediaries we owe a fiduciary relationship to the client to do the very best we can to maximize their investment. Of course there’s the question of quality vs. quantity when it comes to listing inventory. We’d rather have a pre-qualified (seller paid an appraisal fee), educated seller (seller agrees with our opinion of value) and perhaps most importantly, an informed intermediary who has done the work and was paid to do it, to understand the client company right out of the gate. Further, for those offices that have an element of turnover, wouldn’t it be nice to offer a new associate a source of income from day one? We have had one person retire and only 2 others leave our firm in 30 years! Imagine, even at $1,000 per valuation paid 50%/70% to the trainee, they have the opportunity to make enough to cover expenses before the first commission check. Even if you don’t do your own valuations and send the work out, the agent makes a little something, pre-qualifies the seller and learns something about the company before attempting to market it.

We typically advise buyers that companies with multiple profit centers are desirable. Think about your office’s earnings potential with multiple profit centers. Fee paid appraisals, buyer retainers and success fees, and for those that provide litigation support, expert testimony fees all add up quickly. Add the bonus of (fully disclosed) third party financing origination fees and it’s likely your turnover will decrease and you can add another administrative assistant to make sure there’s a live voice on the phone when a seller makes up his mind to sell.

Our philosophy is to never work for free and I propose that every qualified intermediary in our industry consider this practice. The time has come to charge for our expertise like every other professional.

Christopher R. George, CEO
George & Company
Worcester, MA, USA

 
 
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