Selling a business can be overwhelming and time-consuming without a guaranteed price. Hence, many small business owners work with a business broker when they sell. Before hiring a business broker, it's crucial to understand the expenses involved, such as pricing and business broker fees, to make a well-informed decision.
A business broker helps maximize the value when selling or buying a business, ensuring sellers get top prices and buyers secure the best deals. Find out how much a business broker charges.
Business Broker Pricing and Fees
Brokers usually charge 10-20% of the sale price, collected at closing and often split between the buyer and seller.
Suppose your company sells for $100,000; you'd likely pay broker fees ranging from $10,000 to $20,000. Though usually nonrefundable, negotiability might depend on your circumstances.
Brokers charge various fees:
Retainers: Buyers pay flat fees upfront or monthly ($15,000 to $30,000).
Valuation Fees: Fixed rates for business valuation ($7,000 to $20,000 based on firm size).
Success Fee: Percentage fee on the business sale, payable after deal closure.
Minimum Contract: Usually 6-12 months; exiting early may incur significant fees.
Business sizes:
Main Street Business: $1 - $1 million revenue
Main Street businesses typically involve simpler transactions handled by brokers who don't charge upfront or retention fees, and in some states, they're not legally obligated to do so.
Main Street brokers typically charge 10% to 12% on the business's value and an extra 6% on related real estate, sometimes with a minimum commission fee between $10,000 to $20,000.
Lower Middle Market: $1 million - $25 million revenue
For this size range, brokers may charge retainers and commonly set a minimum fee of $35,000 to $50,000. They use two methods: the Double Lehman Scale and flat commissions.
The Double Lehman Scale, a commonly employed approach, traces its origins back to Lehman Brothers. This method involves tiered charges:
10% for the initial million, then
8% for the second million, followed by
6% for the third million, and
4% for the fourth million,
reducing to 2% for any additional amount.
Broker firms sometimes charge a flat commission, typically between 4-6% of the overall business purchase price.
Middle Market M&A: Over $25 million revenue
In Middle Market M&A, options include hiring an advisor, an M&A firm, or an Investment bank. Retainers, typically $5,000 to $15,000, are common, payable upfront or in monthly installments.
Advisors and banks in the Middle Market charge 1-4% or use the Lehman formula for selling your business. Higher sale prices mean lower percentages; for big sales, it can drop below 1%.
Upfront Vs. Post-Sale Fees
Brokers charge upfront or post-sale fees based on percentages of the asking or final sale price, each with its pros and cons.
Upfront fees guarantee the broker's compensation regardless of the sale outcome, while post-sale fees encourage a quicker sale but could lead to selling at a lower price. The choice between upfront or post-sale fees is negotiable and should be discussed early in conversations with the broker.
Success Fees Vs. Monthly Retainers
Business brokers often use a success fee structure, only earning a commission upon successfully selling the business. This incentivizes them to secure the highest sale price.
Monthly retainers are a typical fee structure for brokers. With this arrangement, brokers receive a fixed monthly fee from the business owner, irrespective of the sale outcome. This offers stability to the broker but might not drive them to sell the business promptly.
Success fees and monthly retainers have pros and cons, depending on what suits the business owner and the broker. Success fees mean payment only upon sale, which is risky for the broker. Monthly retainers ensure payment regardless of the sale outcome, reducing risk for the broker.
Tasks of a Business Broker
The broker handles various aspects of selling your business:
Business Assessment and Valuation: Assessing and valuing your business to determine its market price.
Deal Tax Structure: Structuring the business to minimize tax liabilities during the sale.
Confidential Marketing Strategy: Strategically marketing your business to potential buyers while maintaining confidentiality.
Data Room Preparation: Compiling essential documents to attract and vet potential buyers, easing the transaction process.
Client Meetings: Regular updates and discussions regarding the sale's progress and addressing concerns.
Buyer Pre-Qualification: Screening and vetting potential buyers to save time and ensure dealing with qualified individuals.
Buyer Meetings Preparation: Assisting in preparing and strategizing for meetings with potential buyers.
Offer Review and Negotiation: Present and discuss the best offers and manage negotiations with involved parties.
Due Diligence: Conducting a thorough review of documents and prospective buyers, coordinating due diligence meetings.
Closing Support: Assisting in reviewing closing documents and facilitating the closing process with an attorney.
Considering a business broker to sell your small business can offer significant advantages but involves associated costs. Assessing all options is crucial to maximize the value of this investment.
Sunbelt Texas is here to assist you. Our team connects buyers and sellers with over 20 years of industry expertise. Even if you're not actively selling but seeking guidance on structuring your business, Sunbelt Texas is the right partner for you. Start your journey with Sunbelt today.
Business Broker Fees FAQs
Can you negotiate business broker fees?
Business broker fees might be negotiable, typically a percentage of the sale price. Brokers may adjust fees if finding a buyer is tough or tailor them to suit client needs. Discussing the budget and expectations openly with the broker can lead to an agreement benefiting both parties.
Who pays the business broker fee?
Usually, the seller pays the broker's fee, often a percentage of the sale. Yet, there might be cases where the buyer agrees to pay. Discuss this with your business broker before making any agreements.
Are Business Broker Fees Tax Deductible?
Broker fees fall under transaction fees according to the IRS guidelines. Currently, the IRS does not permit the deduction of any transaction fee.
Is paying my business broker upfront advisable?
It's essential to weigh several factors before deciding. Consider your business's value and your desired selling price. If your business holds substantial value, upfront payment might ensure you receive its full worth.
Are business broker fees worth it?
Business brokers are key players in making small business sales successful. They simplify negotiations, ensuring buyers and sellers get what they want from the deal. They assist with due diligence, business valuation, and closing the transaction.