When selling a creative agency or merging with another, owners often engage a broker to help get the deal done. Brokers tap into their networks of potential buyers, gather sales materials, collect information on your company, present data to qualified suitors and arrange the deal closing.
The details of this engagement are formally spelled out in a listing agreement with the broker. And it’s important to get those details right.
A typical listing agreement is an exclusive arrangement that can last anywhere from six months to two years. Identifying and engaging a reputable broker and negotiating an effective listing agreement can significantly affect how much you profit from the sale of your business.
Here are the key considerations when entering into a listing agreement for the sale of your creative agency.
Exclusivity: How many brokers can sell your agency?
A listing agreement is typically an exclusive arrangement. This means that only one broker can act on behalf of the agency in the selling process. This exclusivity generally is also exclusive of your efforts. For example, if you find a potential buyer on your own, you have to send it to the broker so they can do their work and collect their fee.
Once you select a broker and sign the listing agreement, that relationship remains exclusive for a defined amount of time. If you’re uncertain about your broker, consider opting for a shorter term with an option to extend.
Very large deals potentially merit a nonexclusive listing agreement, but those are rare among sales of creative agencies.
Due Diligence: Do you know all you can about this broker?
The main benefits a broker provides are their access to a network of potential buyers and assistance in negotiating terms. With the amount of money at stake, you should gather as much information as you can about the person or firm representing you in the sale of your company.
Research whether they have a good network of potential buyers in your industry and if they have experience negotiating deals for agencies like yours. You should also know what kind of sales material the broker produces on behalf of clients.
Any reputable broker will be happy to give you the names of people they have represented. You can also ask your peer firms who they have used as brokers. Get a feel for how certain brokers have worked with agencies similar to yours. Are they going to push too hard and kill the deal? Will they be too soft and encourage you to close a sale that’s less than ideal just so they can collect their fee?
You also want somebody with experience selling creative agencies or other service based businesses. Someone who sells beer distributorships is probably not going to be a great fit.
Term: How long are you tied to this broker?
Most listing agreements will call for a term of between six and 12 months. A shorter term is beneficial to the agency if you are uncertain about the broker and want to be able to get out soon if the broker isn’t delivering results. A shorter engagement enables you to move on more quickly and begin shopping for other brokers.
Conversely, brokers expectedly prefer a longer term of engagement so they can contact their network, build sales material and put the listing out to the market. A longer term also gives them a better shot at closing a deal and collecting their fee. If you must consider a longer term arrangement, think about asking for a slightly lower commission structure in exchange.
Tail: How long is a broker tied to any future sale?
If the term of a listing agreement expires without a sale, the broker is still entitled to collect a fee if a deal closes with one of the broker’s contacts for a defined period of time. That period of time is known as the “tail” and typically covers anywhere between six and 24 months.
The reason a broker needs a tail period is to recognize that any deals done during the tail period are likely attributable to efforts the broker made during the term. If a term expired but a buyer the broker connected with showed up a day, week, month, or later, it is fair to expect that the agency would still have to pay the original broker a fee.
This applies even if you pursue and secure a buyer on your own. In other words, if a deal is signed during the tail period, you’re still on the hook for the broker fee. What’s more, if you engage a second broker within the initial tail period, you could wind up paying two fees.
Success Fee: When is your broker entitled to compensation?
Success fees can be structured differently depending on the broker and it’s always wise to consult your lawyer about the details that go into triggering payment.
Like a real estate agent’s commission on the sale of a house, a broker fee is generally a percentage of the final purchase price. Say you agree to a 10 percent commission and your company sells for $10 million. The brokerage fee would be $1 million.
The point of negotiation here is in the definition of “purchase price.” The broker will want this as broad as possible. Some brokers will want to include employment agreements with principals as part of the purchase price. Try to avoid this if you can. Employment value is separate from the value of the business.
And don’t hesitate to compare fees across brokers. A few percentage point differences can mean a significant amount of money depending on the deal size.
Retainer: Does the broker charge a monthly fee?
Some brokers will charge you a monthly fee to cover their staff as they prepare materials, gather information and set up meetings to sell your company.
A flat retainer fee might be $5,000 to $10,000 a month. Some brokers will say that’s the cost of hiring them in addition to the ultimate success fee. They can’t operate as though every deal always comes to fruition.
Still, you can try to structure your listing agreement so that monthly retainer fees will be credited against the success fee.
Confidentiality: What information is kept under wraps?
Brokers will maintain a confidentiality agreement with potential acquirers to make sure your company’s information stays protected. But you should still have your lawyer review that agreement before disclosing any information.
Buyers are often competitors, so you want to be careful about how that information is managed — especially the identities of your clients and employees. Include a non-solicitation agreement in the event a deal doesn’t go through. You don’t want anyone poaching your team or client roster.
As the deal progresses, you’ll start exchanging information out of the data room. At some point your buyer will want to talk to employees to know who they want to keep. And they’ll want to know specifics about your clients as well.
A proper confidentiality agreement will protect you from disclosing sensitive company information to unserious buyers who might use that information against you.
Existing Relationships: What if someone you already know becomes the buyer?
If you have any existing relationships with potential buyers, you may want to negotiate exceptions to the fee schedule (or reduced fees) if those existing relationships turn into a deal.
The listing agreement in that situation might specify a success fee that is lower than the usual rate. For example, if the broker’s standard fee is 10 percent, a deal that arises out of an existing relationship might be 6 or 7 percent instead.
Nail the Listing Agreement Details When Selling Your Creative Agency
The difference between an airtight listing agreement and a leaky one could leave you tied to a lackluster broker, missing out on millions in valuation or shelling out thousands in excess fees.
Don’t let the hard work you’ve spent building your agency go down the drain by ignoring the implications of the listing agreement with your broker.
When you’re ready to get it in writing, get in touch with us.