Surprise! This provision in listing agreements sneaks up on unsuspecting business owners more than any other one!
Why?
Many trusting business owners do not have a business attorney review their listing agreement prior to signing.
Many trusting business owners do not fully understand the economic and timeline impact of a tail.
What is a tail? Two definitions.
Real Life Definition - Paying for Failure
Theory Definition – a contractual term that protects the broker by extending their right to a commission for a set time (typically 12 to 24 months) AFTER the listing agreement expires (after they completely failed). It ensures that you still pay them if you sell to ANY buyer that they introduced your company to during the listing term.
Almost all brokers put a tail in their listing agreement and they feel completely justified in doing so. It is a concept predicated upon deceit.
Their concept is that it prevents the seller from waiting out (pulling an end around) the broker’s listing term and then secretly finalizing a deal with a buyer that the broker originally introduced to avoid paying the commission.
What is wrong with this concept? It assumes the seller is deceitful and would conduct themselves in an illicit manner. IF that is the case, a legitimate broker should evaluate the potential client and pass on the listing if they have any integrity concerns.
It truly should be viewed as an insult to the integrity level of all legitimate sellers.
Then there is a massive exposure for the seller in the language itself. What are the parameters and enforceable elements of the phrase “introduced the company to”??
Could it be semi-legitimate?
- Only buyers that submit an IOI or LOI?
- Buyers that signed an NDA and actively engaged in a review of the company?
Then there is the majority that are not the least bit legitimate.
- Broker sends a teaser to every buyer they have contact info for.
- Broker broadcast emails countless people and purposely keeps track of every single person that was emailed or called.
- With this large group there may not even be a response back from the recipient but the broker has “introduced the company”.
- What if the recipient knows that the broker has a very poor record and poor professional image and they would never do business with them?
Now the broker has control over all of those buyers for the time period added per the tail.
The real question you should ask is how long should it take to sell your business? The real answer is less than one year if you have a quality company with quality earnings.
The most standard business broker agreements are for one or two years with a tail of 12 to 24 months.
This means that you are turning over control of the sale of your company for at least 24 to 48 months because you are still committed for broker commissions until the tail expires.
The right answer is a 12-month listing agreement and NO TAIL for a total of 12 months.
If your broker tells you he/she can sell your company in a year, why should they get a tail for at least another entire year? They should not.
If the tail comes into play that means that they told you that they could sell your company in a year and then they FAILED. Why should they be rewarded for failure?
I am going to provide one of many real-life examples. I was contacted by the owner of a home health company that I valued at 50,000,000. His circumstances were like so many others.
His listing agreement was for a 3% fee for one year and included a two-year tail (3-year lockup).
The broker failed for 12 months and then they asked for a 6-month extension “because they had opportunities working”. They failed for another 6 months. By now the business owner thought that he would have had his company sold and he would be happily retired.
Instead, he was back at square one. NO, he wasn’t. It was worse. He was still obligated for a two-year tail from the date of the expiration of the extension (now a total lockup of 3.5 years with no progress made).
He came to me to sell his company. When I learned about the tail I asked him for a list of the people that were “introduced to the company”.
He went to the broker and they gave him a list of over 200 that were “introduced to the company” and they made it very clear that they expected their full fee.
Their full fee was 1,500,000 for failing for 18 months.
This is a company that should have been under LOI within 90 days of introducing to the market.
It was that attractive and profitable.
I had to explain to the business owner that I would need to charge him 3% also.
He was incredibly distraught over this situation because he was in a position where he had to pay double fees or not sell his company.
There is one more important thing to consider. How much brand damage did the company image sustain in front of the 200 buyers that were ineptly “Introduced to the company?”
Fundamental Lesson – never ever agree to a tail. Secure a legitimate advisor that is confident that he/she can sell your company within one year. If they do sell within one year you succeed, and if they don’t you are only locked up for one year and not two or three times that long.
It is your company and you need to stay in control.