The Facts on Finder's Fees


Who wouldn't like to receive a wad of cash for thinking up a deal? It can -- and does -- happen, but you'd better know the rules

What kind of finder's fee would one get for making a strategic introduction that concludes with the acquisition of the seller's company by a buyer? The transaction size could range between $50 million and $75 million.

-- J.D., Lafayette, Colo.

The circumstances vary widely when it comes to making business introductions. Hard-and-fast rules don't apply here, experts say, and unless the parties have agreed to a finder's fee up front in a written document, they have no legal obligation to pay you at all.

Does that mean an individual who helps a seller get a nice price for his company doesn't deserve a reward? Not necessarily. But if monetary compensation is to be doled out, it's usually at the discretion of the main players in the deal.

PERCENTAGE BASIS.

In the spectrum of people who make introductions, on the high end you might find a licensed agent or business broker who actively represents the seller's company, vets the financial suitability of potential buyers, and lines up interviews with top candidates.

Such a person would definitely require a contract at the outset of the sales process that would specify his fee, typically a percentage of the sales price, says Gene Pepper, a Glendale (Calif.)-based business broker.

Whenever a deal involves a professional, the payment is typically called a "referral" fee, rather than a finder's fee. How much the broker gets paid depends upon the up-front negotiations with the seller, and it usually correlates to how much the broker thinks the business will fetch. In terms of your example, "I would ask for 1% of the selling price, and be happy to wind up with 0.05%," Pepper says.

FEELINGS OF OBLIGATION.

What about the other end of the spectrum, where an intermediary acting on a casual basis simply makes a prescient telephone call or bright suggestion that puts a buyer in touch with seller? That person may have to settle for a simple "thanks" or "I owe you one," says Colin Gabriel, a business broker and author based in Carlsbad, Calif.

The relationship between the finder and the broker or intermediary sometimes plays a part in these situations. A seller may feel more inclined to cut a friend in on a percentage of the sale than she would be to compensate someone she doesn't know well. Or, sometimes the opposite applies: A seller aided by an introduction from a stranger may feel more obligated to pay that person a fee.

The manner in which the introduction takes place also counts when it comes time to considering a finder's fee. It may not be terribly valuable when an intermediary simply suggests casually that a potential buyer call the seller to inquire about the business.

HELP FORGOTTEN.

But when an intermediary identifies a potential buyer, interests him in the business, and actually arranges a meeting between the two parties, that involves more work, and a fee may seem more appropriate. In some instances, the intermediary may even suggest an attorney or bring in a CPA to help negotiate the sale. A situation where an intermediary puts in additional time and effort is more likely to call for a monetary reward.

One thing is for certain: Unless the person who makes the introduction asks for a finder's fee, he's not likely to get one. The parties to the deal will be too wrapped up in consummating the purchase to recall the role that the intermediary played. Or they may deem it worthy of a dinner out or a pat on the back.

Bringing up the matter and making the case for a monetary reward may pay off, however. The bottom of the range for a strategic introduction in a transaction of the size you mentioned would probably amount to $50,000, Gabriel says. Although "someone involved will say that's a lot for a telephone call," he adds.

AVOIDING ILL WILL.

If you're thinking about making a strategic business introduction and believe it merits a finder's fee should things work out, agree on the details of that fee beforehand. Get a lawyer to draft the agreement, and have it notarized, Pepper suggests, even if you're making the deal with a relative or best friend.

There's no reason to make a strategic introduction if it's going to be a deal-breaker to an important relationship.

Have a question about your business? Ask our small-business experts. Send us an e-mail at Smart Answers, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, N.Y. 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.

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