This article is Part 1 of a series of blogs focusing on three pre-business sale documents:
- Part 1: Broker Mandate Letters;
We have also developed a library of resources that will help clarify your thinking about selling your business and get you started on the right track. Selling your business may not be something you do every day, but we do. Call us now on 1300 654 590 or email us to discuss how ADLV Law can help you realise the value within your business and guide you through the various stages of the sale process.
When selling your business, appointing a broker is usually the smart move. They can bring in qualified buyers, run a structured process, and help push a transaction across the line. However, you must be cautious about rushing into a Broker Mandate Letter (BML) without truly understanding its implications.
This document is more than a formality, it shapes the economics, control, and risks of your sale process. And unless it’s tailored to your situation, it can create misaligned incentives and unintended fee exposure.
This article breaks down the purpose of the BML, who the key parties are, the commercial terms and the two issues that regularly create headaches for sellers: the broker payment triggers and the details of the post mandate relationship during the ‘tail period’. We also explore how to choose a broker and ensure their interests are aligned with yours.
What is a Broker Mandate Letter?
A BML sets out the terms of engagement between the seller and the broker. At a high level, the broker will:
- Market the business to potential buyers.
- Assist in preparing materials (e.g. Information Memorandum).
- Coordinate communications and manage offers.
- Support negotiations and due diligence.
For this, the broker is typically paid a success fee of a fixed amount or a percentage of the transaction value, often due on signing of the sale agreement, regardless of when (or if) the seller receives the full purchase price.
Who are the parties?
The parties relevant to a BML typically include:
- The Seller: the individual(s) or entity(ies) with authority to sell the shares or business.
- The Broker: a corporate advisor, M&A specialist, or investment banker appointed to find and qualify buyers.
- Third-Party Buyers: not parties to the mandate, but central to the transaction and fee triggers.
In multi-vendor sales, it’s important to confirm who is bound by the mandate and how fees are shared if multiple sellers are involved.
Aligning interests: fee timing and payment risk
A core issue with many BMLs is misaligned incentives, especially around the timing of the broker payment.
Scenario: A broker negotiates a sale for $5 million, payable as $1 million upfront and the remainder over 3 years in instalments tied to performance. The broker’s success fee (say 4%) is based on the full $5 million, and becomes payable on signing.
This arrangement works well for the broker: they receive $200,000 upfront. But for the seller, the majority of the consideration remains at risk. If the business underperforms or the buyer defaults, the seller may never receive the balance, but the broker keeps their full fee.
If you’re selling in stages (e.g. a partial exit now, full sale in future), the broker’s fee should align with your liquidity, not just the theoretical deal value.
Key Takeaway: Link the broker’s entitlement to actual payments received, especially where deferred consideration or performance-based earn-outs are involved.
Definition of payment triggers: keep it tight
The success fee is usually payable to the broker when a ‘transaction’ occurs. However, if this term is defined too broadly, it can trigger unintended liabilities. A typical BML might define ‘Transaction’ as ‘any arrangement involving the transfer, restructuring, recapitalisation, or sale of any part of the Company, its business, or its assets, directly or indirectly, to any party.’
This could include:
- Internal group restructures.
- Capital raisings or shareholder transfers.
- Non-controlling interest sales.
- Transactions with parties the broker had no hand in approaching.
This broad definition of ‘transaction’ clearly suits the broker, but a seller might prefer a narrower definition, linking the payment of the success fee to, for example, “a sale of more than 50% of the shares in the Company to a third party first introduced by the Broker during the Term of the Mandate, for value.”
Key Takeaway: Ensure you understand what ‘transaction’ triggers payment of the broker fee.
Tail periods: the fee that lingers
Tail periods entitle brokers to a fee even after the mandate ends, if a transaction closes within that ‘tail’ period with a party introduced during the mandate. That might be fair in principle, but in practice, tail clauses are often drafted far too broadly.
Common issues if tail clauses are drafted too broadly include:
- Inappropriate length: Tail periods lasting 12–24 months.
- No Active Engagement: Fees triggered by any contact with a party, even if there has been no active engagement by the broker.
- Evidence: Some BML are silent on how an ‘introduction’ is evidenced.
Consider negotiating these safeguards with your broker:
- Limit the tail to a reasonable period (e.g. 6 months).
- Require the broker to provide a buyer introduction list before termination.
- Require that the broker played a material role in the eventual transaction.
- Carve out buyers already known to the seller (e.g. existing clients or investors).
Key Takeaway: Understand that the end of the mandate does not mean the end of your financial relationship with your broker.
Special considerations for family-owned businesses
Family businesses bring legacy, relationships, and intergenerational expectations into a sale process. These factors introduce additional sensitivities that should be reflected in the BML. Some considerations to factor into a BML when selling a family business include:
- Not All Sellers Are on the Same Page. Family shareholders may have differing views about: whether to sell at all; when to sell; what price is acceptable; and/or whether to sell to a competitor, private equity, or another family business.
Key Takeaway: Ensure the BML clearly identifies who the legal ‘seller’ is and who is authorising the broker to act. If multiple family members hold shares, get written alignment before engaging a broker, especially if only one family member is driving the process.
- Legacy and Reputation. For many family businesses, the sale is not just a financial transaction, it’s the end of an era. Reputational concerns (who the buyer is, how the brand is handled, what happens to staff) can affect the choice of buyer and deal structure.
Key Takeaway: Consider including approval rights over marketing materials and buyer shortlists in the BML. You don’t want the broker sending your sensitive materials to unsuitable or inappropriate parties.
- Future Involvement of Family Members. Sometimes family members remain employed or retain minority equity post-sale. That’s a commercial arrangement, but the BML may still trigger the success fee based on the overall transaction value.
Key Takeaway: Make sure the definition of ‘transaction’ doesn’t catch partial exits, employee buyouts, or internal succession plans unless you want it to.
- Emotional and Structural Readiness. Some family businesses are not operationally or emotionally prepared for sale when they engage a broker. This can lead to prolonged processes or breakdowns mid-way.
Key Takeaway: Use the initial engagement with the broker to test the waters, but build in clear termination rights if the sale doesn’t progress or the family changes direction.
Selecting and managing your broker: strategic considerations for sellers
In our opinion, engaging a broker is a practical necessity for most business owners. You are not the person best placed to handle both day-to-day business operations and the demands of a complex sale process. That said, not all brokers are equal. A poorly chosen broker, or a poorly negotiated mandate can cost you not just thousands in unnecessary fees, but potentially hundreds of thousands or even millions in unrealised value.
An experienced broker understands how to create and maintain competitive tension. A lazy or misaligned broker, by contrast, can fail to explore the full market, settle too early, or lack the capability to manage high-stakes negotiations. Choosing well is critical.
Run a ‘beauty parade’
Experienced sellers use a process known as a ‘beauty parade’. This involves shortlisting potential brokers based on referrals from your accountant, lawyer, or industry peers, then interviewing each one with a standard set of questions:
- What do they know about your business and your industry?
- Have they recently sold similar or complementary businesses?
- What transactions have they concluded, what fell through, and why?
- What metrics did they achieve (e.g. multiples of earnings or revenue)?
- How many buyers did they shortlist?
- How did they manage competitive tension?
- What was the hardest part of the deal and how did they manage it?
- What’s their proposed sale process and timeline?
- What strategic value do they see in your business?
- How is their remuneration structured, retainer vs success fee?
- Who are their competitors, and how do they compare?
Avoid brokers who offer no detail, no preparation, or no track record. Don’t confuse cost with value.
Granting exclusivity and paying commission
A broker will ask for exclusivity. This is acceptable, but only if they meet agreed milestones and you can terminate if they fail to deliver.
The exclusivity period should reflect their marketing plan and expected deal timeline, usually 3 to 6 months. If they’re only bringing you a handful of buyers, limit exclusivity to that prospect list or specific industries or geographies.
Commissions vary, 1–3% for mid-sized businesses, 5–6% for smaller ones. Be clear on how the commission is calculated. Does it include stock, work in progress, or debt assumptions? What happens if the price is paid in instalments or subject to performance hurdles? Commission payments should mirror actual money received by the seller.
Managing termination and tail clauses
We discussed this issue in more detail above, but in short, brokers will often claim commission on sales that occur after their mandate ends, especially if they claim to have introduced the buyer. However, most brokers don’t bring fully formed buyers to the table. They market the opportunity to people you may already know (suppliers, competitors, customers).
To balance these interests, limit the tail period to 6 months and restrict it to buyers genuinely introduced or managed by the broker. Carve out anyone you were already in discussions with before the mandate.
Doing it yourself
In some cases, you might consider managing the sale yourself with support from your accountant, lawyer, and financier. But unless you have deep transactional experience and time to spare, this approach rarely saves money and often costs more in missed opportunities or avoidable risk.
Get it right at the start
Your BML sets the tone and the legal framework for the entire sale process. If you’re not careful, you might end up paying for a transaction you didn’t want, with a buyer you already knew, on terms that don’t serve your long-term interests.
Before signing a mandate:
- Align the broker’s incentives with yours
- Limit success fee triggers to actual outcomes
- Understand what you’re committing to (and for how long)
The broker may bring you buyers, but the mandate brings the risk. That’s why we strongly recommend having the document reviewed and negotiated by an experienced commercial advisor.
How we can help
At ADLV Law, we help business owners navigate the commercial and legal detail of pre-sale contracts, including BMLs, to ensure the agreement reflects your real-world expectations and risk appetite. A properly structured mandate, with aligned incentives and clearly defined success triggers, reduces surprises and improves your chances of achieving a clean, value-maximising sale. The investment in good advice at this early stage is minimal compared to the cost of disputes or mismatched outcomes down the track. Call us on 1300 654 590 or email us to speak with one of our trusted advisers.
The information contained in this post is current at the date of editing – 11 July 2025.
