Selling your business can be rewarding, but it also brings complexity and risk. Before any listings or offers begin, you and your broker should have a written plan that defines how you’ll work together. That plan starts with the engagement letter for selling a business.
This legal document outlines the professional relationship between the seller and the advisor. It explains what services will be provided, how fees will be handled, and what both parties understand about their obligations. Without it, uncertainty or conflicting expectations may slow or disrupt the sale.
A well-defined engagement letter helps create structure, clarifies payment terms, and provides a written record of each party’s responsibilities. It turns verbal trust into a clear agreement and supports smoother communication throughout the process.
What Is an Engagement Letter in a Business Sale?
An engagement letter is a short, formal agreement between a business owner and a broker that defines the services to be provided, fees, and mutual responsibilities. It formalizes the professional relationship and gives both sides a shared reference point before the sale begins.
Creating this letter strengthens trust by putting key expectations in writing so both parties can refer to them later if questions arise.
Plain English Definition and Purpose
An engagement letter functions as a roadmap for collaboration. It identifies the parties involved, the scope of services, and the terms of the agreement. Written in plain language, it clarifies who is responsible for what. While it is a legally binding document, its main purpose is to record commitments, payment arrangements, and timelines that guide the professional relationship.
Why It Matters More Than You Think in M&A
In mergers and acquisitions, many moving parts can change quickly. A clear engagement letter helps maintain consistent communication and outlines how confidential information will be handled. It can also specify how unexpected circumstances—like a withdrawn buyer or delayed closing—should be managed. This clarity reduces the risk of confusion and keeps everyone aligned on goals and values.
Common Misconceptions About Engagement Letters
Before drafting or signing, it helps to clear up a few persistent myths that can lead to gaps in your engagement letter, according to Rood’s guidance for CPAs on effective letters (Rood, 2023).
- “An engagement letter is optional.”
The source shows many claims proceed without one, which raises risk. Treat the letter as a core risk-management tool that defines the contractual obligations between the parties. - “A brief, generic letter is fine.”
Ineffective letters are “overly brief” and miss key elements. Spell out services, responsibilities, terms and conditions, and deliverables with sufficient detail. - “Scope can stay broad, we will clarify later.”
Disputes often stem from mismatched expectations. Reduce that risk by clearly delineating the scope of services and limits up front. - “We do not need to name all parties involved.”
Properly identifying the client, related entities, and a singular point of contact helps prevent third parties from claiming the work was performed for their benefit. - “Timing and end date are not necessary.”
Stating when services start and end clarifies expectations and helps determine important timelines, including when certain legal periods may begin. - “Fees can be worked out after the work starts.”
Including fees or a fee estimate, plus contingencies that may change the amount, increases the likelihood of payment and reduces fee disputes. - “Deliverables do not need to be specified.”
Describe the work product and any limits on its use. Written deliverables provide clearer evidence of what will be produced and for whom. - “Professional standards and limitations are implied.”
Naming relevant standards and limits of responsibility, such as no duty to detect fraud in certain services, defines the duty of care if a dispute arises.
Key Clauses Every Engagement Letter Must Include
A complete engagement letter outlines the essential terms of the agreement without unnecessary complexity. The following clauses appear in most professional letters and define how the working relationship will function.
Scope of Work – Define What’s Included
The scope section describes the services to be provided and any limits to the broker’s role. It should include a detailed description of tasks such as preparing marketing materials, contacting potential buyers, and supporting negotiations.
Example for clarity:
“Broker agrees to provide advisory and marketing services for the sale of [Company Name], including preparation of listing materials, buyer outreach, and negotiation support until closing or termination of this agreement.”
Fees & Compensation – Spell Out Payment Terms
When setting fees and payment terms, clarity is critical. A recent Court of Appeal decision in Cantor Fitzgerald & Co v Yes Bank Limited [2024] EWCA Civ 695 highlights how unclear or overly broad drafting can create costly disputes. The court found that ambiguous wording in Cantor’s engagement letter led to confusion over whether a financing fee applied to a later public offering. Because the terms were not clearly defined, Cantor was denied payment.
This case shows the importance of writing engagement letters in simple, direct language that accurately reflects what both parties intend. Make sure the payment structure, scope of engagement, and trigger events for compensation are stated in clear and straightforward terms. For example, specify whether the arrangement involves a flat fee, commission, or hybrid model, and include any additional fees or reimbursable out-of-pocket expenses. When the terms of engagement are well defined, both sides are less likely to face disagreement over payment obligations (Hutchinson & Booton, 2024).
Exclusivity – Granting or Denying Sole Rights
Exclusivity defines whether one broker has sole authority to represent the sale. Granting exclusive rights encourages focus and accountability, while non-exclusive arrangements allow flexibility but may divide attention.
Pros: Dedicated effort and clear accountability.
Cons: Limited options if the partnership proves unsatisfactory.
Always include start and end dates for exclusivity and describe what happens once the term expires.
Termination & Tail Period – Protect Future Deals
The termination clause explains how either party may end the relationship and what notice is required. A tail period provision clarifies whether a broker is entitled to compensation if a buyer they introduced completes a deal after termination.
Example: “If a transaction with a buyer introduced by Broker closes within 12 months after termination, Broker remains entitled to the agreed fees.”
This section helps both parties manage expectations and avoid disputes about delayed closings or overlapping buyer introductions.
Tips for Writing a Clear and Effective Engagement Letter
Writing an engagement letter is mostly about clarity and alignment. The goal is to set expectations and document key responsibilities in a way both parties can easily understand.
Use Plain English – No Legalese Required
Avoid heavy legal phrasing. For example, write “both parties agree” instead of “the undersigned hereto mutually acknowledge.” Simple, direct language supports better understanding and reduces the chance of confusion during the legal process.
Be Specific but Not Overly Complex
Each section should state who is responsible, what they will do, and under which circumstances. Keeping sentences concise makes the agreement easier to follow. A well-defined scope, payment schedule, and communication plan create a practical and enforceable document.
Review Examples and Checklists for Guidance
Review a sample engagement letter or free templates from credible business or legal sources. These show common engagement letter outlines and highlight key sections such as dispute resolution, confidentiality agreement, and data protection. Comparing examples helps determine which provisions fit your business.
When to Get Legal Input Before Signing
Even though engagement letters are often brief, they remain legally binding. When large sums or complex ownership structures are involved, it’s wise to have a qualified attorney review the document. Legal review can confirm that the terms meet applicable law and adequately reflect the parties’ intentions.
Sample Engagement Letter Language (Plain English)
An effective engagement letter presents the agreement clearly and logically so both parties understand their commitments.
Example Clauses for Each Major Section
- Scope: “Broker will provide advisory and marketing services related to the sale of [Company Name].”
- Fees: “Broker will receive a success fee of X percent of the total sale price upon closing.”
- Confidentiality: “Both parties agree not to share confidential information with any other party without written consent.”
- Termination: “Either party may terminate this agreement with 30 days’ written notice.”
How to Adapt Samples for Your Unique Situation
Templates should be used as guides rather than final drafts. Adjust wording to fit your company’s structure, deal size, and industry. Add details about other costs or additional fees when relevant. The objective is a well-defined document that accurately matches your business circumstances.
Where to Find a Helpful Checklist
Professional associations and business law resources often share engagement letter outlines and free templates. Look for examples that include a signature line, sections for out-of-pocket expenses, and provisions protecting confidential information.
Why a Solid Engagement Letter Speeds Up the Sale Process
A detailed engagement letter supports a smoother sale by clarifying terms early. When both parties agree on scope, payment terms, and communication, progress is less likely to stall.
Reduces Back-and-Forth and Confusion
Clear expectations limit repetitive questions and revisions. Once the services to be provided and payment structure are in writing, both sides can focus on moving the transaction forward efficiently.
Keeps the Broker Focused and Accountable
A signed agreement outlines goals, deliverables, and payment conditions. This helps the broker prioritize the sale process and gives the client a basis for evaluating performance.
Builds Trust and Transparency
Selecting a broker involves trust. A transparent engagement letter reinforces that trust by defining confidentiality, dispute resolution, and fairness in writing. It transforms verbal promises into documented commitments that both parties can reference.
A Strong Engagement Letter Sets the Sale in Motion
A clear engagement letter for selling a business helps both sides set expectations, clarify terms, and build mutual confidence. When the scope, fees, and confidentiality provisions are well defined, the sale process typically runs more smoothly.
A straightforward letter can reduce uncertainty and prevent misunderstandings. Take time to review each section carefully, ask questions when needed, and confirm agreement before signing. Clarity supports better outcomes for everyone involved.
Frequently Asked Questions
What is an engagement letter when selling a business?
It is a legally binding document that outlines the scope, fees, and responsibilities between a broker and a seller during the sale of a business.
Why is the exclusivity clause important in an engagement letter?
It determines if one broker has sole rights to represent the sale, helping both parties manage expectations and avoid overlap.
How are broker fees typically structured in an engagement letter?
They are usually arranged as a commission, flat fee, or hybrid payment model described clearly in the agreement.
What does a tail period mean in a broker agreement?
It defines whether a broker remains entitled to payment if a buyer they introduced completes a transaction after the agreement ends.
Can I write an engagement letter without a lawyer?
Yes, business owners can draft a basic version using templates, but legal review is advisable to ensure the letter aligns with the law and protects both parties.
References
- Hutchinson, J., & Booton, J. (2024, September). The importance of simple and clear engagement letters – Cantor Fitzgerald & Co v Yes Bank Limited [2024] EWCA Civ 695. Beale Law. https://beale-law.com/article/the-importance-of-simple-and-clear-engagement-letters-cantor-fitzgerald-co-v-yes-bank-limited-2024-ewca-civ-695-8/
- Rood, D. K. (2023). 8 critical elements of an effective engagement letter. Illinois CPA Society.
