Robin is a community manager and content writer at Beacon. He is a sophomore at Virginia Tech's Pamplin College of Business, double majoring in Finance & Philosophy, Politics, and Economics.
Business Broker Fees: How Much Are They, And Who Pays?
Who Are Business Brokers?
When you want to sell or buy your business, you want the best value possible. As a seller, you want the highest selling price, and as a buyer, you look for the lowest price possible. Business brokers help you achieve the best value possible.
A business broker is a person or a firm that are intermediaries who help owners sell their businesses. They do this through: (1) conducting valuation for the businesses (2) finding prospective buyers, (3) structuring potential financing when necessary and (4) helping them close the deal.
Why Should I Hire a Business Broker?
Business brokers become the navigating tool in your unique and complex path towards buying and selling a business. Not hiring a business broker could cause damage to your business in the sale process through various issues such as:
- Mis-pricing the business
- Not dedicating sufficient time to marketing your business
- Not knowing how to qualify buyers
- Getting distracted by running the business
Non-professionals such as real estate agents often lack the adequate resources or network to sell a business and close the transaction properly. Conversely, broker firms are often filled with agents that specialize in companies that belong to specific industries or possess unique characteristics. As a result, they not only ensure that business owners get the best value possible, but they also guide you through a variety of tasks that saves you time and, potentially, money.
What are the Tasks of a Business Broker?
Depending on the size and complexity of your business, a broker may have to do some or all of the following tasks:
Business Assessment and Valuation –
The broker uses your business’s operational and financial details to prepare a business valuation and marketing documents. These result in a Broker’s Opinion of Value commonly known as the “Most Probable Selling Price”. Official appraisals known as Certified Business Valuation are done by certified valuation analysts.
Deal Tax Structure –
The broker determines the best way to structure your business for the least tax liability towards you. (Tax implications of buying a business)
Develop & Execute a Confidential Marketing Strategy –
These strategies could include conducting industry-specific research to find the best buyer prospects for your business, conducting direct mail and phone marketing campaigns to reach out to prospects, and advertising your business through listing websites and business publications.
Put together a Data Room –
Brokers also help you develop documents that you will need to attract and vet buyers and ease the sale transaction process. Some documents include an executive summary, a confidential information memorandum, and a transition plan.
Conduct client meetings –
Brokers will conduct meetings with you on a regular basis to communicate any progress on the sale as well as discuss any questions or concerns you might have.
Pre Qualification of Buyers –
Few brokers such as Beacon will have already vetted all buyers that are presented to you, and reviewed their financial information. This saves you a significant amount of time from talking to unqualified buyers.
Prepare for Buyer Meetings –
Brokers help you prepare and strategize for meetings with potential buyers that they have organized to ensure you get the highest value for your business.
Review offers –
The brokers present you with the best sale price for your business and help you review and discuss these offers. They also manage any form of negotiations from all third parties, including attorneys and accountants.
Due Diligence –
Brokers conduct an extensive review of all documents and prospective buyers. They also help you plan and coordinate meetings with attorneys and accountants to conduct any due diligence necessary.
The broker will help you review closing documents and find an attorney for the closing process.
How Much Do Business Brokers Charge?
Business Broker’s commissions often vary depending on many different factors. However, the most significant factor in the cost of a broker is the size of the business.
Brokers can also charge clients varying types of fees including:
Retainers – Flat-fees paid by buyers as one upfront payment or as monthly charge. Middle Market M&A firms can charge between $15,000 to $30,000.
Valuation Fees – A flat-fee for conducting a business valuation. They can cost between $7,000 to $20,000 depending on the size of the firm.
Success Fee (commission) – A percentage fee on the sale of your business that is paid once the deal is closed.
Minimum Contract Length – Most brokers will require you to sign a minimum contract of 6-12 months. These contracts can have large fees for clients that want to step away from the contract.
Business can be divided into three different size categories.
Main Street Business
Lower Middle Market
Middle Market M&A
Main Street Business: $1 - $1 million in revenue
Main Street Businesses often are the least complex transactions. These businesses are usually handled by “Main Street” brokers who do not charge any upfront or retention fees. In some states, they are legally not required to charge you any upfront or retention fees.
Main Street brokers charge anywhere in the range of 10% to 12% on the value of the business and an additional 6% on any associated real estate. Often these brokers may also have a minimum commission fee ranging from $10,000 to $20,000.
Lower Middle Market: $1 million - $25 million in revenue
In this size category, some brokers may potentially charge retainers and most commonly have a minimum commission fee ranging from $35,000 to $50,000.
Lower Middle Market brokers can often use two methods to charge their clients; The Double Lehman Scale and a flat commission.
The Double Lehman Scale– The more frequently used method, the double Lehman scale, originated from the Lehman Brothers. In this method, the charges to a client are made in stages:
- 10% on the first million, plus
- 8% on the second million, plus
- 6% on the third million, plus
- 4% on the fourth million, plus
- 2% on any remaining amount.
A flat commission– Sometimes, broker firms may simply charge a flat commission in the range of 4-6% on the total purchase price of the business.
Middle Market Mergers and Acquisitions: Over $25 million in revenue
At the Middle Market M&A level, you can either hire a middle-market advisor, M&A firm, or approach an Investment bank. At this level, retainers are common and can range from $5,000 to $15,000 upfront or in monthly payments.
Middle Market advisors and Investment Banks can charge a flat fee anywhere from 1-4% or a variation of the Lehman formula for administering the sale of your business. As the sale price of your business increases, the percentage charged by advisors and banks decreases. In some cases involving large companies, you could be charged less than 1% when the sale price is extremely large.
Who Pays the Broker's Fee?
Almost always, the Broker’s fee is paid by the seller. Additionally, if the buyer was introduced to the business by a different brokerage, the commission will be divided by the buy-side and the sell-side brokerage on a 50/50 basis. This is called co-brokerage.
Are Broker Fees Tax Deductible?
Broker fees are listed under transaction fees within the IRS. As of this writing, the IRS will not allow you to write off any form of a transaction fee.
Beacon is a new simple way to buy and sell a small business anywhere across the nation. We believe in supporting the small business community and want to help you whether you are a buyer or a seller.
As of writing Beacon offers:
- No retainer or upfront fees – Beacon does not charge buyers or sellers any retainer or upfront fees regardless of the size of the intended transaction.
- Our market rate is only 7.5% (normal market rate is 10-12%) – You instantly save anywhere between 2.5-4.5% by choosing Beacon.
- We don’t have a minimum fee – We welcome all businesses, big or small. Regardless of your transaction size, Beacon does not charge a minimum fee.
- We don’t lock you into a 12-month long-term contract – Unlike most brokers, we don’t lock you into a long-term contract. So you have the freedom to leave us anytime you don’t feel satisfied with our services.
Click here to join us and get a free valuation of your business through Beacon.