Business Broker Fees [Explained] - What You Need to Know

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.

What is a Business Broker?

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.

Is it Worth Hiring a 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:

• Getting you the best sale price: As a business owner, you may misprice your business by either undervaluing or overvaluing it. The broker helps you get the best value for your business, ensuring you don't leave money on the table through undervaluing or scaring away prospective buyers by overvaluing.

• Saving your deal from falling apart: Business sales are complex, and the slightest mistake can be costly. A knowledgeable and experienced broker helps you avoid expensive mistakes that could sink the deal and prolong the time your business stays on the market.

• You can keep running your business: Working a business sale while still actively running the business is challenging. Your broker takes up most of the sale responsibilities, so you can focus on increasing the value of your business right up to the sale.

• They smoothen the sale process: Brokers make the intricate business sale process smoother. They can sell your business faster and more successfully than you can.

How Much Do Business Brokers Charge?

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%.

Types of Business Broker Fees

Here are the types of broker fees you can expect to pay for the sale of your business:

1. Commission

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.

2. Retainer, Upfront, or Consultation Fees

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.

3. Per-Transaction Flat Fee

Small broker business fees are often charged as a single flat fee. This usually happens in small businesses valued under $100,000.

4. Success Fee

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.

What is the Business Broker Commission Structure?

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.

Factors Influencing Business Broker Fees

The amount you pay as business broker fees depends on the following aspects:

• Complexity of the Deal: While simpler transactions lead to lower fees, complex sales require higher pay rates because they require more work and expertise. 

• Location: A business sale in an urban center attracts a higher broker fee because there are many competing businesses for sale.

• Broker's Reputation and Experience: An established broker with many deals to show as proof of their capabilities can charge higher fees. A newer broker charges lower fees to attract potential business sellers to build up experience and expertise.

• Size of Your Business: If your business is large, your sale price will be higher, which attracts higher broker fees to match the higher levels of risk and responsibility.

• Broker's Fee Structure: While most brokers use the commission system, the typical business broker fee often combines different types of payments. For example, some may charge a valuation fee alongside the commission.

How to Sell a Business Without a Broker   

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:

• Sell Your Business Directly: You can sell your business yourself if it's small or you are highly confident in your marketing and negotiation skills.

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.

• Use an Online Marketplace: Business marketplaces like BizBuySell offer sellers a digital platform to list their businesses and access a diverse pool of potential buyers.

You'll follow the direct sale method, where, after creating a listing, you have to handle inquiries, negotiate the sale, and finalize the deal.

• Use a Business Auction: You can present a small business to potential buyers and ask them for competitive bids within a specific timeframe. The auction can be online or in person. After the auction, you accept the highest bid and finalize the sale.

• Use an M&A Team: If your business is worth at least $50 million to $500 million or more, you would be better off working with a mergers and acquisitions team.

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.

Frequently Asked Questions (FAQs)

Here are questions you may have about business broker fees:

Can Broker Fees be Negotiated?

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.

Are Broker Fees Tax-Deductible?

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.

Can I Hire Multiple Brokers to Increase My Chances of Selling?

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.

Conclusion

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.