Business transfer agents on up-front fees...

Rupert Cattell, Amberglobe

"I think up-front fees are justifiable because an agency, like any other business, needs cash flow. And obviously they are making a pretty significant investment in time and advertising spend on trying to sell the business, so I don’t think it's unreasonable. It also shows commitment on the part of the vendor.

"Sellers should be wary if the up-front fee is large and the valuation is far in excess of what they had expected or what other agents have estimated. Like with anything, you should always get a second opinion."

Shaun Sweeney, Turner Butler

"Usually, the larger the up-front fee, the lower the success fee.

"The choice for the seller is whether they want to pay a substantial fee in the belief that the agent can sell the business, and a small success fee, or pay a slightly higher, success-based fee at the end. It's a commercial decision – there’s nothing wrong with either model.

"Because we're long established, successful at selling businesses and financially strong, we can afford to offer our famous no sale, no fee, guarantee.

"I'd never be critical of anyone charging up-front fees; it's just a different model to ours."

David Rhodes, Horizon Business Agents

"They're fine as long as it's reasonable. The definition of 'reasonable' is a matter of what the client would accept, and as long as they're told the truth up front and what is being done with the fee then I think it's perfectly acceptable.

"If an agent demands £1,000 up front and a £500 cancellation fee, my belief is that they're trying to fool the client.

"For a larger business I might take a fee up front, while for a smaller business I may well take it on with no up-front fee. If I tell a client their business is worth 'X' amount but they insist that they want far more, then perhaps I would demand an up-front fee – because I can't afford to lose money on it.

"However, I've stopped taking up-front fees altogether at present, because of the recession and the introduction of energy performance certificates, which adds to the client's costs."

Derek Burgoyne, Cornerstone Business Agents

"Business agents or brokers usually charge a healthy fee when they successfully introduce a buyer to a business and negotiate the sale to completion. In a perfect world they would not charge an up-front fee, the agency agreement would be on a no sale, no fee basis, and there are, in fact, agents that operate in this manner – very successfully.

"One of the problems for a broker who does not charge an up-front fee is that they can be instructed to sell businesses for owners that are really not very committed to the sale. They are the type of people who say 'everything is for sale at the right price' and 'I will sell if I get the right offer'.

"They often will not provide the financial information required by the agent, will be unhelpful about arranging viewing appointments, and generally waste potential business buyers' and the agents' time.

"The other question that arises is: what does the up-front fee cover? Agents work in different ways.

"Some for instance set up a marketing budget to cover costs such as advertising. The money paid in advance covers these costs and a detailed budget is provided to their clients.

"If a lot of press advertising is required then this is fair in my opinion. If it were my business I would rather work this way than receive a bill sometime in the future.

"The big problem is when agents see the up-front fee as the main source of income. They send a salesman to the business, he overvalues and over-promises on the chances of achieving a sale, and then asks for a massive up-front fee, sometimes around £1,000, sometimes many thousands!

"This type of salesman is usually paid a substantial part of the payment as commission. Poor quality sales particulars are then created, the business is placed on a few websites and that's about it.

"Business owners should be very wary of agents promising the earth – and then charging it – to place their business on their books.

"In my opinion up-front fees should only be charged in two sets of circumstances. First, if they are allocated to specified costs and a regular schedule is provided to show where the money is being spent.

"Often, agents who work this way will charge a lower sales fee when the sale concludes as some of their marketing costs have been covered. Chartered Surveyors, members of the Institution of Commercial & Business Agents and other professionally qualified companies often work like this.

"The other acceptable way to charge up-front fees is if they are set at a reasonably low level, say £400 or under, and are part of an overall fee structure covering marketing on internet sites and press advertising. This proves to the agent that the business owner is serious about selling, but as the figure only contributes to marketing costs the agent has to achieve a sale to recover his costs and make a profit."

Don Glossop, Andon Frères

"'Up-front fees' is an inappropriate label, and as such I think brokers should never charge "up-front fees". If, as part of the sale process, certain services are provided for which it's appropriate to charge a fee – for example, pre-sale consultancy, tax planning or the preparation of a detailed information memorandum – then it's perfectly reasonable to charge one, but generally when a service has been provided, rather than 'up front'.

"Business broking is a results-driven activity and it's appropriate therefore for the majority of fees to be success-related. If a broker wants to charge high up-front fees then the incentive to achieve a sale is reduced."

Norman Younger, Kensington Business Brokers

"We charge a modest listing fee for putting businesses on websites, but I think the industry is moving away from charging substantial up-front fees. We've worked with people who have paid agents thousands of pounds to sell their business and failed, then we've sold them within six weeks and charged no up-front fee.

"You've got to check what you're getting for your up-front fee. If you're paying a £2,000 up-front to sell a business worth, say, £100,000, you want to ensure you get a personal service.

"You should actually see the letter that goes out to targeted buyers and make sure it's a sustained campaign. You want to know you're getting something for your money."

Business transfer agents on exit fees...

Rupert Cattell, Amberglobe

"It is probably fair to charge exit fees if there's no up-front fee and the contract says that the vendor pays any advertising cost incurred. We never charge exit fees."

Shaun Sweeney, Turner Butler

"We ask the client to give us a reasonable time period to sell their business and don't ask for exit fees.

"I don't see anything wrong with exit fees so long as the client is fully aware of them. It's something they negotiate.

"I do feel it a little unfair if someone pays an advance fee and a cancellation fee. We charge neither, and guarantee no sale, no fee – so clients don't risk a penny of their own money.

"There's a place in the market for every business model, and enough brokers out there for everyone to find the right level of service they're looking for. I always make a point of never criticising other brokers; they've all got their strengths and weaknesses."

Norman Younger, Kensington Business Brokers

"I think they're justifiable if people have put in effort on your behalf and made some introductions. If the guy takes it off the market for genuine reasons within a few weeks, you can make the case for letting them off, but generally an exit fee is fair as long as it's transparent."

Derek Burgoyne, Cornerstone Business Agents

"Some agents ask for a sole selling rights period, six months being reasonable in my opinion and 12 months or more being unreasonable.

"During the period of sole selling rights most agents will charge a large fee if the agreement is cancelled. This is often reasonable as a good agent will have spent a lot on marketing a business, based on the fact that he or she has at least six months to find a buyer, and has confidence that even if the business isn't sold within the sole selling rights period, if he has provided a good service the client is likely to let the agreement continue.

"If the agreement is cancelled prematurely, the agent stands to lose a substantial sum of money, so it is fair that an exit fee is charged.

"On the other hand, if the agent has already charged a massive fee for listing a business and has done very little, if any, proactive marketing, then it is unfair to charge a large exit fee as well – as many agents do. It is therefore vitally important that business owners study the agent's agreement in detail before signing.

"Some unscrupulous agents work on the basis of overvaluing to obtain a large up-front fee, then hoping the client gets fed up and cancels the agreement so they can charge yet another massive fee – great work if you can get it! These companies are being paid thousands of pounds for not selling a business, and their so-called agents or brokers are no more than con merchants.

"Sellers watch out, check what the fee will be if the agreement is cancelled within the initial period, try to get the agent to agree to a maximum of six months – or less – and most importantly check whether there is a fee due even after the initial period of agency has expired – if so, do not instruct that agent, or get this part of the agreement deleted.

"Some agents won't insist on a minimum period of agency. They will be confident that clients will be happy with the service and gamble that they won't change their mind, acknowledging nevertheless that personal circumstances can change.

"These agents may charge a modest exit fee when an agreement is cancelled as a contribution towards costs. Most people would agree that in these circumstances the fee, if at a level below £500, is fair and reasonable given that they are not tied into an agreement for a long period and can cancel if their circumstances change.

"Sellers should thoroughly read and understand an agreement with an agent before they sign it and never be coerced into signing by a slick salesman."

David Rhodes, Horizon Business Agents

"I personally work on a multi-agency, no sale, no fee basis, or a sole-selling rights basis with a minimum six months period. If they wanted to withdraw in that period then they have to pay a fee.

"As long as you give someone a reasonable amount of time to sell the business, most agents will allow them to withdraw the instruction.

"Having said that some severance fees are quite large – as much as £7,000 – which means the client is stuck with that agent. If they did instruct another agent they'd have to pay the first agent a substantial fee."

Don Glossop, Andon Frères

"From a broker's standpoint, there ought to be a mechanism for charging an abort fee in specific circumstances, but clients generally don't like abort fees. They would argue that if a broker doesn't sell their company nor do their job properly, why then should they pay an abort fee for terminating the agreement – and it's difficult to argue with this.

"On the other hand, from the broker's perspective, if the broker puts in lots of work on a success-fee basis, and as part of the project find lots of skeletons in the cupboard, the chances of sale are diminished. If a client simply changes his mind, decides not to sell and takes his company off the market, then in these circumstances, an abort fee would be justifiable.

"It's difficult to please both sides."

Business transfer agents on paying for valuations...

Derek Burgoyne, Cornerstone Business Agents

"The costs of selling a business are considerable so you should, if possible, avoid paying for a valuation.

"If business owners would, however, like to know how their business will value when a buyer's lender instructs an independent valuation, they should instruct a valuation by a company of valuers, who are on most lenders panels. Most banks and finance brokers can provide a list. This can be a very good selling tactic as the valuation can be shown to prospective purchasers as proof that the asking price is realistic, and in fact many business buyers will then go on to purchase a copy of the report for their lender.

"There are problems with this as a business can often be valued at very different figures by three valuers.

"In my experience a valuer valuing a business for an existing owner for refinancing purposes, for example, will value the business higher than he would for a prospective purchaser. The explanation can only be that the valuer is more cautious when acting for a purchaser or purchaser's bank.

"A payment for valuation should not be required if the business owner is careful in choosing an agent. If the agent cannot justify his valuation then avoid that agent, make sure that the agent who values your business is also the person who deals with it at every other stage of the sale and can therefore answer questions on the value.

"It should also be kept in mind that the better business valuers acting for banks or purchasers will phone the agent dealing with the sale to discuss the business and value. If your agent cannot give a rational explanation of how the asking price was calculated there is a very good chance that the sale will not proceed – at the price being sought at least.

"I doubt there is any evidence that an agent who charges for an initial valuation gives a more accurate valuation than one who does not."

Norman Younger, Kensington Business Brokers

"I don't think you should, although many in the industry charge them. There's a limit to how much you want to pay someone to value your business.

"We send a questionnaire out to vendors, who can give turnover, profit and generally profile their business, and we work on the premise that vendors won't lie on the figures as it's not in their interests to waste prospective buyers' or their own time. We also carry out some checks ourselves, so we're usually confident of our valuation and our chances of selling.

"So personally I'm not a great fan of paying for a valuation; it's just a way of the agent making money. Some make their living that way but it's not how we work."

Don Glossop, Andon Frères

"Although I don't like the analogy, business brokers are bit like corporate 'estate agents', and generally, you wouldn't expect to pay an estate agent for a valuation.

"However, as I've said, valuing SMEs and mid-corporate businesses is not like valuing a property; it's very complicated and can be a minefield. Someone can spend lots of time and charge a lot of money for undertaking the valuation, and not come up with a clear-cut figure.

"They're more likely to generate an indicative valuation, which will be within a range and subject to a number of caveats. Is it a cost-effective exercise to spend thousands of pounds on such a valuation? I tend to think not.

"As to whether a client should ever pay for an indicative company valuation, I would say it depends on what the valuation is wanted for. If it's part of providing a wider sale service, I think it's reasonable for the client to expect it to be provided as part of the pre-sale discussions and therefore not charged for.

"If a more detailed valuation is required for other reasons, for example tax planning, shareholder disputes, etc, but with no involvement in the sale process, then I think it's perfectly reasonable for the broker to charge for this service."