Read the fee base and the tail before you sign the engagement letter

The engagement letter decides what you net. Read three clauses first: the fee base, the payment trigger, and the tail. Then test whether the intermediary may lawfully collect at all. A registration defect turns a signed fee into a live defense. A loose fee base makes you pay on cash you never receive.

What does the fee base in a broker engagement letter actually cover?

The fee base is the defined number the percentage runs against. A letter may call it enterprise value, gross proceeds, total consideration, or cash actually received at closing. Those four phrases produce four different numbers on one sale. An undefined base means paying on money that never reaches you.

Owners argue about the percentage. The base is where the money goes. Ask what it sweeps in:

• Debt the buyer assumes or repays at closing. Not cash to you. A gross-proceeds base charges you anyway.
• A seller note. Unpaid to you, yet the fee is due at closing on the full face amount.
• Escrow and holdback reserves, some of which never comes back to you.
• Earn-out consideration, often defined at the maximum figure rather than the amount earned.
• Consideration allocated to a covenant not to compete, and post-closing employment pay.
• Retained real estate, such as a lease of a building you own personally.
• Purchase price adjustments, which move both ways but are often counted only upward.

Application. A letter defines gross proceeds as all consideration paid or payable, including assumed debt and deferred payments. The sale closes with part cash, a seller note, an escrow, and an earn-out. The whole fee falls due at closing, on money you have not collected.

Consequence. That is enforceable. Courts read unambiguous language by its ordinary meaning and do not relieve a party of a bad bargain. Ambiguity is often construed against the drafter, but buying an argument is not keeping your money. And the letter’s governing-law clause, usually the intermediary’s home state, decides whose rules apply.

Law: Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153 (Del. 2010) (general interpretation principle; your letter’s governing law controls).

Why does the fee scale, not the deal size, decide the number?

A fee scale is the schedule of stepped percentages applied to slices of the price. Two letters carrying the same headline rate produce materially different fees on one sale, because the scales step differently. Declining, repeating, doubled, and threshold tiers are different prices for the same work.

Never accept a scale described in conversation. Ask that the letter carry a worked exhibit: the fee at a low price, your expected price, and a high price. Some intermediaries will not attach one. Ask anyway, and build the arithmetic yourself before you sign.

A scale you never modeled is a price you never agreed to.

When is the broker’s fee payable if the money has not arrived yet?

Payment timing is a separate clause, and it protects your closing cash. Many letters make the entire fee due at closing, computed on consideration payable rather than paid. The fix is to match fee timing to collection timing, item by item, in the letter.

Ask for four things. Fee on closing cash at closing. Fee on escrow and holdback amounts if and when released to you. Fee on earn-out consideration as you collect it. Fee on seller note principal as principal is paid, never on the interest. Expect resistance. The deferral you win is cash you keep.

Then handle the failure case in writing. Say that no success fee is owed if no sale closes. Silence does not say that, and some letters make a fee payable on termination or on a transaction merely agreed. If a buyer defaults and you keep the deposit, say whether a fee attaches.

Do retainers credit against the success fee, and what should the expense clause say?

A retainer is money paid before results. It may be refundable, non-refundable, creditable against the success fee, or none of the above. Silence is the intermediary’s draft, not your bargain. So is the expense clause, where uncapped reimbursement becomes a second fee.

On retainers and monthly fees, answer three questions in the text: whether each payment credits dollar for dollar against the success fee, whether crediting stops after a stated number of months, and what happens to unearned amounts on termination.

On expenses, ask for four features. Reasonable and documented. The aggregate capped at a stated figure. Written pre-approval above a stated threshold. Firm overhead, staff time, technology charges, and internal research excluded. If the cap is refused, hold the other three. Uncapped reimbursement is a blank check drawn on your proceeds.

How long should exclusivity, termination and the tail run?

Exclusivity gives the intermediary the sole right to market your company for a stated term. The tail extends fee entitlement past termination. Both are reasonable in principle. Scope is the problem. A tail firing on any party ever contacted converts a contact list into a claim on your next deal.

Ask for these terms:

• A fixed exclusivity end date with no renewal without your signature, and termination by either party on written notice, with method and effective date stated.
• A tail limited to a written schedule of named prospects, delivered within a stated number of days after termination, for a period stated in months, not years.
• Named prospects limited to parties the intermediary introduced and actively worked, evidenced by written contact and a signed confidentiality agreement.
• Express exclusion of parties you sourced yourself, shareholders, family, management buyers, and anyone already in contact with you.

Definitions do real work. In one sell-side fee suit the trial court held the broker was owed no success fee because the buyers who actually bought sat outside the defined term the fee clause depended on. On appeal, judgment for the seller was affirmed on another ground, the broker’s registration status, and the broker recovered neither fee nor litigation expenses.

Law: EdgePoint Capital Holdings, LLC v. Apothecare Pharmacy, LLC, No. 20-1810 (1st Cir. July 23, 2021), affirming the judgment of the District of Massachusetts.

A tail limited to named, actually-worked prospects protects the intermediary who did the work. An open-ended contact trigger taxes the buyer you found yourself.

May the intermediary lawfully take the fee at all?

Registration status can decide whether the fee is collectible. Where your sale transfers equity, the intermediary may be effecting a securities transaction, and a defect becomes your defense. Whether an LLC or partnership interest is a security depends on the facts. Make the letter answer this.

Since March 29, 2023, a federal exemption in Section 15(b)(13) of the Securities Exchange Act has covered M&A brokers on transfers of ownership of eligible privately held companies. It is an exemption from federal registration, not a license, and it carries conditions.

An eligible company must have no class of securities registered with the SEC and must have had, in the fiscal year ending immediately before the fiscal year in which the intermediary was first engaged, EBITDA under $25 million or gross revenues under $250 million. Stated as of August 2026, those figures adjust for inflation every five years. Your size sits inside them, so the conditions decide. The exemption is lost if the broker:

• Takes custody of, holds, or transmits the funds or securities exchanged.
• Acts for an issuer in a public offering, or in a shell company transaction.
• Provides financing for the transfer, directly or through an affiliate.
• Helps a party obtain outside financing without complying with applicable law and disclosing its compensation in writing.
• Represents both sides without written disclosure and written consent from both.
• Sells to a buyer group it helped form, sells to a passive buyer, or binds a party to the transfer.
• Is barred or suspended, or cannot reasonably believe the acquirer will control and actively manage the business after closing.

Law: 15 U.S.C. 78o(b)(13).

State law is separate and is not displaced. Some states reach business sales through real-estate licensing statutes, and some of those attack the fee rather than the broker. Florida is the clean example: no commission contract for a service covered by the real estate chapter is valid unless the person was licensed when the service was performed. Whether your intermediary’s work sits inside that chapter turns on what it did and how you sell.

Law: Fla. Stat. 475.41; Fla. Stat. 475.01(1)(a).

Under Section 29(b), a contract made in violation of the Exchange Act, or whose performance involves a violation, is void as regards the violator’s rights. Courts treat that as voidable at the innocent party’s election, not automatic: the violation must be bound up with performance, the remedy carries time limits, and equitable discretion remains. A defense worth having, not a plan. The appeal above predates the exemption.

Law: 15 U.S.C. 78cc(b).

So make the letter state the basis relied on: the federal exemption, a state registration, a real-estate license with its number, or broker-dealer registration. Left blank, the question waits for buyer’s counsel to find in diligence.

How does the fee base affect your tax result and an SBA-financed buyer?

Stated as of August 2026, the fee clause carries tax consequences and, where your buyer borrows through the SBA, structural ones. Who pays the fee, what the base sweeps in, and how the price is allocated all get reported. Settle those points before closing, with your CPA.

Amounts paid that facilitate an acquisition of a trade or business are generally capitalized, not deducted. A safe harbor lets an electing taxpayer treat 70 percent of a success-based fee as not facilitating. Read the limits. It reaches only the covered transactions the regulation defines, and a selling owner’s fee is frequently treated instead as a selling expense reducing the amount realized. Availability turns on your structure and on who incurs the fee. The election is not automatic: a statement must be attached to the return for the year the fee is paid or incurred, and taxpayers who took the split without it have had to request relief.

Tax: Treas. Reg. 1.263(a)-5; Rev. Proc. 2011-29; 26 U.S.C. 6110(k)(3).

Allocation matters because it is disclosed. In an asset sale the price is allocated across asset classes under the residual method, and buyer and seller each file Form 8594. Line 6 asks whether the purchaser also bought a license or covenant not to compete, or entered a lease, employment, or management arrangement with you, and requires a schedule giving the type of agreement and the maximum consideration. Ask your CPA how each bucket is taxed where you sit.

Tax: 26 U.S.C. 1060; IRS Form 8594 (Rev. 11-2021), line 6.

If your buyer borrows through the SBA 7(a) program, the program rules shape your structure and your timing. As of August 2026 the operative origination guidance is SOP 50 10 8, effective June 1, 2025 for loans receiving an SBA loan number on or after that date and revised by procedural notice since, including changes effective March 1, 2026. Read the version in force when your buyer applies, and ask the lender what it requires on a seller note and on any role you keep. Form 159 separately requires written disclosure of compensation paid to agents.

SBA: SOP 50 10 8 (effective June 1, 2025, as revised by procedural notice); SBA Form 159.

What should you do before you sign the engagement letter?

Treat the engagement letter as the first negotiated document of your sale. Most owners sign it unchanged, months before they negotiate anything else, and every later dollar runs through it. Work this list on paper, with your own numbers, before you sign.

• Rewrite the fee base to consideration actually received by you, with exclusions listed.
• Get the scale arithmetic in writing at three prices.
• Match payment timing to collection on escrow, earn-out, and note principal, and say no fee is owed if no sale closes.
• Fix the retainer treatment, dollar for dollar, and say what happens on termination.
• Cap expenses if you can; require documentation, pre-approval, and exclusions.
• Convert the tail into a schedule of named, actually-worked prospects, in months.
• Get the registration representation in writing, with the exemption or license named.
• Send the marked-up letter to your deal counsel and your CPA together.

An intermediary who has done this before will negotiate these points. One who refuses to define the fee base, document expenses, or name the tail prospects has told you how it will go.