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TRANSACTION FEES
Unless otherwise specified in a contract, a broker is entitled to a fee if, from his efforts, he introduces a buyer to the seller and a transaction results. In this circumstance, it does not matter if the broker negotiated the deal. A broker is also entitled to compensation if, from his efforts, he introduces a buyer who is ready, willing, and able to purchase the seller's company on the seller's terms -- even if the deal falls through.
In both cases above, the broker is considered the "procuring cause" of the transaction. However, disputes sometimes arise. For example, suppose a broker introduces you to a buyer, but negotiations result in no deal. A year lapses, and then talks begin again. A deal is consummated, but on different terms from the original proposed deal. In this case, the broker may not be considered a "procuring cause" and does not get a fee.
Now, the above need not be the case with your engagement agreement. Rather, you negotiate these points. For example, the phrase "ready, willing, and able" is quite vague. You can, in the contract, set forth what this means. This may mean that the deal is 10% cash and the rest in Nasdaq or NYSE stock. The minimum price is $5 million. There must also be an employment agreement (for three years at $100,000 per year) and some type of bonus structure (over, say, the next three years you can make 30% of the purchase price of the company). Also, you can say that payment is made only if a deal is closed. Thus, the terms can be very creative. And, by being specific, you can help reduce potential disputes.
The most common compensation schedule in brokers' agreements is the Double Lehman scale, wherein the fee is a percentage of the transaction that decreases incrementally as the transaction amount goes higher. Here is a sample:
12% for the first $500,000
10% for the second $500,000
8% for the second $1,000,000
6% for the third $1,000,000
4% for the fourth $1,000,000
2% for any amount more than $4,000,000
Yet again, you can modify these any way you want. Maybe your company will sell for at least $30 million, and for any price above this, you are willing to pay no more than 0.25%.
EXPENSES
The broker may be required to travel, seek the advice of counsel, and incur other out-of-pocket expenses. Consequently, the broker will likely propose an "expenses clause" that pays for reasonable expenses. Also, it is a good idea to specify a fixed amount that must be approved by the seller.
