In the business succession planning market, there are essentially three models:
Success-based fee
Monthly flat fees + success-based commission
Consulting fee + success-based commission
Pure success-based fee
There are business brokers who offer their services on a pure success-based fee structure. With this type of succession support, the focus is often on attempting to close a deal quickly. The unique characteristics of a family business, a thorough analysis, and the preparation of comprehensive sales documentation are usually given insufficient attention. However, if a sale takes too long or the process becomes too challenging, many consultants lose interest and move on to the next project.
Caution is advised if the compensation model deviates from the “buyer-pays” principle and thus suggests a conflict of interest: In this case, a consultant is only ostensibly mandated by the seller but wishes to be paid by the buyer. This is often a clear indication that the client relationship is unclear. A reputable M&A advisor represents their client and is also compensated by that client.
Hans-Reinhart Grünbaum, a lawyer at the Frankfurt Chamber of Industry and Commerce (IHK), also commented on this in an interview with the Saxony-Anhalt Succession Club: “Reputable advisors I know only agree to be paid exclusively on a success-based basis in exceptional cases. Providing sound advice involves a significant amount of work that should not be underestimated. The success of the transaction, on the other hand, depends only in part on the advisor.”
For this reason, it has proven sensible to treat consulting and placement as separate services and to compensate them accordingly. In practice, the following two models have become established for this purpose.
Monthly Flat Fees + Success Fee
Particularly in the case of very large corporate transactions, compensation based on monthly flat fees (so-called “retainers”) with a subsequent success fee has become standard. This provides clients with a certain degree of predictability.
In family-run small and medium-sized businesses, however, this approach often leads to a common consulting pitfall in corporate succession planning. The costs resulting from such a service contract with a term of up to two years can quickly add up to tens of thousands of euros. A specific scope of services is usually lacking. Concrete, measurable results are also often absent.
Since reputable consultants do not earn their money through high monthly flat fees, it is worth considering the following model:
Consulting Fee + Success Fee
A clearly defined proposal with a scope of services makes the costs of succession planning consulting transparent from the outset. It includes fixed prices for a business valuation or a comprehensive executive summary, as well as time-based components for facilitating negotiations. Every service rendered is transparent. The commission due upon a successful outcome usually covers a significant portion of the upfront costs fairly.
In rare cases, a flat-rate billing is applied to service packages upon the achievement of predefined goals. This includes, for example, the completion of the property profile or the signing of a letter of intent.
How much does succession planning consulting cost?
Due to the complexity of business succession, it is not realistic to predict the exact cost in advance. Typical costs include, for example:
Preparation of a property description and a business valuation;
Search for business successors, including vetting their backgrounds and intentions;
Targeted outreach to pre-screened prospective buyers
Support during negotiations;
Due Diligence (DD): A detailed assessment of a company’s strengths and weaknesses. For smaller businesses, this is often done “manually” by reviewing files and contracts. For larger transactions, a digital online version is becoming increasingly common. The time required for the buyer to prepare for and conduct such an audit should not be underestimated. Experienced succession advisors help structure the process and minimize the effort involved in such an audit as much as possible. Fees for tax advisors and attorneys to address all tax and legal issues, draft a Letter of Intent, and prepare the purchase agreement; notary fees (usually paid by the buyer); success fee.
Looking back at the large number of projects handled by K.E.R.N – The Succession Specialists, we can say that the average costs for all advisors involved in a business succession typically range between 5 and 10% of the transaction amount.
A well-organized business succession is an investment
For the seller of a business, it is important to consider not only the investment in complex consulting services but also the term of a consulting agreement. Reputable consultants generally do not agree to any time-bound commitments at all, but rather use trust as the benchmark for collaboration. If consultants demand a time-bound commitment, caution is advised!
This is because if trust is compromised at any point during the consulting process, the client must have the option to terminate the relationship at any time—without any time limits.
In summary, it can be said that good succession planning consulting costs money. Given the growing shortage of entrepreneurs, poor or even absent consulting can cost a fortune!
