Navigating a business sale is often overwhelming. As a seller, you need to hire the right professionals, such as business brokers, to help you.
Working with a broker means paying business brokers fees, which can significantly affect your bottom line from the sale. But what exactly are these fees, what do they cover, and why are they important to your goals?
As we explore the topic further, you'll notice that there are times when you would be better off working with an entire team of M&A experts.
At Exitwise, we work with you to establish an industry-specific M&A team to help you sell your business under the most favorable terms and at the highest possible purchase price.
Consult with us today at no cost so we can help you establish your dream M&A team for a successful sale at the best price possible.
Business sale broker fees vary widely depending on several factors, but here is the most commonly applied approach based on Lehman's formula:
Additional broker costs are based on your business size. That means:
A business broker is an individual or company that helps you sell or buy businesses by acting as a professional intermediary between the seller and the buyer.
You may find a business broker who specializes in your industry, business type, company size, or side of the transaction.
A business broker who specializes in the sell-side transaction is called a sell-side business broker or business sales broker. A broker on the buying side is called a buy-side broker or buyer broker.
Since you want to preserve as much financial advantage from the sale as possible, it might seem counterintuitive to work with a broker.
However, there are many reasons why it's advisable to hire a business broker:
Business brokers make money primarily through commissions on successful sales, with charges typically ranging between 5% and 15%. The average business broker commission is 10%.
As we'll see later, the commission rate for selling a business depends on several factors. In some industries, it can be as high as 20%.
Here are the types of broker fees you can expect to pay for the sale of your business:
A commission is a performance-based fee your business broker charges you when they sell your business successfully. As the seller, you pay this fee at the sale's closing.
Most business brokers and sellers prefer the commission model because it offers brokers the best motivation to sell the company at the highest price since their pay increases as the purchase price increases.
Some business brokers charge an upfront or monthly fee for services such as marketing, preparing sales materials, and valuing your business.
If you are lucky, the broker may deduct these fees from the commission, meaning the fees were meant to ensure you stay committed to the broker-seller relationship.
Small broker business fees are often charged as a single flat fee. This usually happens in small businesses valued under $100,000.
Recently, business brokers have begun using “commission” and “success fee" interchangeably. However, some charge a success fee that's separate from a commission.
In this sense, a success fee refers to a broker fee for selling your business within a set timeframe. The fee acts as a reward to the broker for fast-tracking the sale.
There's no regulation or law that sets business broker commissions and fees at a given level. Each broker uses their own model to determine how much each client they serve should pay in commission and other fees.
Most business brokers use the Modern Lehman Formula or Double Lehman Formula as their commission structure.
For example, if you are selling a business for $5 million, here's how the broker would charge you using the Double Lehman Scale:
The total payable commission for the transaction will be $300,000.
Another notable aspect of broker commission structures is that you may have to use a co-brokerage system.
The business seller generally pays the broker fees to the sell-side broker. Where there are both sell-side and buy-side brokers, the brokers typically split the sell-side commission between them at no extra cost to you.
The amount you pay as business broker fees depends on the following aspects:
Before you sign a deal with a business broker, take time to read it through to be sure you are not overpaying.
Check for:
Broker fees are not fixed. You can avoid these business broker red flags and negotiate for a fair deal using these tips:
Take time to review the broker's agreement and ensure you understand how they've calculated their fee. Pay more attention to the commission structure, exclusivity, timeframe, tail period, and termination clauses.
If anything is unclear, ask the broker to clarify. Compare their contract with that of other brokers in the market. You can also use a valuation calculator
Whether they've charged a typical 8%-12% commission or a flat fee, negotiate for a lower rate. You can get them to agree to a performance-based commission, such as a lower commission with a success bonus. Or, ask for a tier-based structure, where you pay a lower percentage, like 5% of the sale price, and a higher rate, like 12% if they sell above the target price.
Also, request lower valuation fees and ensure you have well-prepared business reports, clean finances, and projections.
Instead of making an upfront payment, opt for monthly payments. Request for a discount if the broker does not sell within a specific timeframe.
That means lower monthly payments after the specified period.
Treat your potential brokers with professionalism. Ensure you are in good communication.
Respect and acknowledge their expertise, and let them know you value their input. This will help build trust and win better deals.
If your business is small and worth $100,000 or less, you can sell it without a broker to maintain control over the process.
If your business is worth over $50 million, you might want to work with a bigger team of business sales experts to ensure the deal has a higher chance of getting done right the first time.
Regardless of the reason, here's how you can sell your business without a broker:
The shortcoming is that self-selling is time-consuming and requires extensive research. Your business might stay on the market for too long and lose value as you try to balance running and selling it.
You'll follow the direct sale method, where, after creating a listing, you have to handle inquiries, negotiate the sale, and finalize the deal.
An M&A team includes more experts than just a business broker, such as attorneys, accountants, wealth advisors, and investment bankers.
You can work with us at Exitwise to recruit and manage a team of these experts who will bring more expertise and experience to cover every aspect of the complex sale, including legal and tax requirements.
Consult with us for free today to work with an expert M&A team who will help you sell your business at your dream sale price.
Here are questions you may have about business broker fees:
Business broker fees aren't set in stone. You can always negotiate for more favorable rates with your broker to better suit your financial goals.
Negotiating broker fees isn't just about saving yourself some money. It's also about ensuring the service they offer you is worth the amount you pay.
Sell-side broker fees are considered an expense in selling a business (a selling cost) and are tax-deductible if they meet certain conditions.
Broker fees qualify for a tax deduction if you pay them during a provable, legitimate business transaction. Additionally, they must be necessary and ordinary expenses that connect directly with the business sale.
Be sure to talk to your tax accountant to determine the parameters of your business sale and the tax obligations or deductions it brings.
Hiring multiple sell-side business brokers may sound like an ideal plan for selling your business faster, but it can actually be counterintuitive.
Working with multiple brokers can create conflicts with buyers, exhaust you as the seller, and damage the brokers' reputations.
Instead, it's advisable to work with an entire team of M&A experts, which is diverse and involves everyone working together to ensure the deal goes through. You can talk to us at Exitwise so we can help you pick and work with the right M&A team.
Paying a premium broker fee makes sense when you’re selling a business with high valuations.
Or when you contract an experienced broker with a broader network of potential buyers that guarantees higher sale prices.
Yes, they do. Under the commonly used fee structure, larger businesses pay a lower percentage than smaller businesses.
For instance, a company worth $25M+ will likely pay a 2% commission, while a company worth $1M will pay a 10% commission.
When you know about business broker fees and how they work, you can negotiate confidently with your broker to ensure you get the best value for your money.
If your business sale is more complex beyond the expertise of a business broker, you'll want to work with an M&A team of tax accountants, investment bankers, attorneys, and wealth advisors.
Reach out to us at Exitwise so we can help you find the best M&A team, negotiate favorable fees, and manage the business sale successfully.
Let Exitwise introduce, hire and manage the best, industry specialized, investment bankers, M&A attorneys, tax accountants and other M&A advisors to help you maximize the sale of your business.
