Situation: A company has contracted with a broker to sell the company. At the minimum acceptable sale price to the founder, the commission would be 2.5%. Is this reasonable? How should the founder think about earn-outs, residual payments, and role post-sale? What is a reasonable broker commission?
Advice from the CEOs:
- The proposed commission structure looks reasonable. To validate this, ask merger and acquisition experts what they think reasonable commission rates on a sale of this size looks like in the current market.
- Beware of earn-outs – don’t take them if offered, at least not without a fight. The challenge with earn-outs is that it may tempt the buyer to report the books in a way that minimizes your share. This will depend upon the terms, but experience advises against this alternative.
- Similarly, you don’t want a residual payment conditioned upon your remaining with the company for a period following the sale. The buyer will ask because they see you as important. Counter with an employment agreement at twice your current salary.
- Your job following the sale is assuring a smooth transition, not company growth. Growth is the new owner’s responsibility. They wouldn’t be talking to you if they didn’t see a growth opportunity.
- Understand that their vision for the company is not yours. Accept this gracefully. Once the company is sold it is no longer your company.