You have worked long and hard to build up your company, and now you are considering retiring. How should you go about selling your business, and what types of fees can you expect to pay? Learn about the different fee types and structures for business brokers or Mergers & Acquisitions (M&A) firms.
How Much Does It Cost to Sell a Business?
This process can cost anywhere from next to nothing to up to 15% of the sale of your business. If you manage to sell your business without hiring a business broker, you only have certain fees and payments for the transaction. Generally, selling your business on your own results in losing more money than hiring a business broker would cost. This is because selling your business on your own usually results in a lower sale price.
Since it is also tough to effectively sell your business without a business broker, you will probably pay a business brokerage fee to sell your business once selling it on your own is unsuccessful. How much it costs to sell a company depends on how you sell it. A business broker’s fees for selling your company can vary, just as the cost to sell a business through an M&A firm will vary.
How Much Does a Business Broker Charge to Sell a Business?
Brokerage fees vary widely. Some brokers will help sell any business that approaches them, and they typically have an upfront fee or are new to the industry. Other brokers will only sell specific companies. The size of your business and the type of broker will determine the cost of selling your business. Typical business broker commissions and fees are anywhere from 5% to 15% of your business’s sale price.
The average business broker commission is around 10%. That is the general fee average for a business broker. Since the fees for a broker are similar, you should consider other factors beyond cost. When and how you pay that fee depends on the business broker.
Business broker fees vary based on the work being done, the types of businesses that a business broker sells and the level of marketing a business broker performs to sell your business. The fee for a business broker covers the cost of various things in addition to the broker’s hard work and services.
Standard Business Broker Fees
The business broker fee structure can vary depending on the broker. Some disclose business broker fees within the initial steps of the selling process. However, that doesn’t mean you owe those fees immediately — many brokers use this as an opportunity to inform you before the process.
Whoever you work with will often take a percentage as a business broker commission. Typically, you will negotiate this price before listing your business for sale and pay it after closing. Here are some other fees brokers may charge:
Retainers
A retainer fee is a payment made to a business broker to secure their services and cover initial costs. It can either be an upfront charge or a monthly payment, and it’s typically deducted from the success fee upon completion of a sale.
Valuations
These are fees for completing a business valuation. Valuations are crucial for larger businesses. They offer a clearer picture of the company’s worth, which helps with strategic decision-making, financial reporting and potential transactions like mergers, acquisitions and sales. A valuation also helps establish credibility and trust with investors and stakeholders.
Valuation fees can vary based on a business’s size and complexity. Naturally, larger and more complex businesses need more comprehensive analysis and valuation reports, resulting in higher costs. More in-depth appraisals, like those necessary for legal proceedings and mergers, usually cost more due to the increased financial analysis involved.
Legal Fees
If your business doesn’t have an in-house legal team, you will need to hire a law firm to help ensure a smooth, compliant transaction. An attorney’s fees will vary depending on the scope and duration of the work involved. Factors like valuable intellectual property (IP) assets and complex tax regulations can increase legal fees.
Accounting Fees
Like legal fees, accounting fees can vary widely depending on the complexity of the sale, ranging anywhere from a few thousand to tens of thousands of dollars. These fees cover various tasks, including reviewing financial statements, providing tax advice and assisting with due diligence.
Success Fees
A success fee is paid to the broker following the successful sale of a business. It’s typically a percentage of the sale price, which is agreed upon before the broker is hired. There are different structures of success fees, such as:
Fixed: A fixed success fee is a flat rate for a specific service.
Flat percentage: A broker may charge a flat percentage success fee if your business is valued under $10 million.
Scaled: With a scaled success fee, the business broker’s fee percentage decreases based on how much money they get you for your business.
Reverse scaled: A reverse scaled success fee is similar to a scaled success fee, but the percentage increases as a business’s enterprise value increases.
What Are the Fees for Selling a Business Based on Size?
The broker fee for selling a business can vary depending on your company’s size and revenue. To determine where your business would fall, look at the three size categories:
Main Street: These are the smallest companies a broker will take on. These businesses have revenue of less than $1 million, and there are generally no upfront or retainer fees.
Lower middle market: These companies have between $1 million and $25 million in revenue. You may see retainer and minimum commission fees — some brokers calculate a fee based on the Double Lehman Scale.
Middle market: A middle-market business earns over $25 million in revenue. An M&A firm or investment bank will handle these transactions. There are often retainers and flat fees.
The seller is responsible for paying the broker fees, so have an honest conversation with your broker about future costs. This way, both parties know the payment expectations. Learning about the different types of upfront and post-sale fees from business brokers will help you determine what is best for your situation.
Upfront Fees vs. Post-Sale Fees From Business Brokers
While business brokers use many approaches to charge for their services, the two primary routes are an upfront fee and a post-sale fee. Some business brokerage firms charge an upfront fee and an additional fee when the business is sold. Other business brokers will only charge a fee once your business is sold.
There are different reasons for these approaches. Some are designed to benefit you, and others benefit the broker.
Should You Pay an Upfront Fee for Selling Your Business?
Many advisors request that you pay an upfront fee. From their perspective, it indicates you are serious about selling your company. It also helps them cover marketing and labor costs.
However, is paying an upfront fee really worth it? A brokerage firm with a consistent track record of selling businesses with a commission paid at the closing should be able to cover the costs of the marketing and time invested in selling a business.
Additionally, brokers who are only paid a commission after selling a business will likely only accept assignments when they truly believe they can sell your business. If you are asked to pay an upfront fee, you don’t know if the advisors are actually confident they can sell your company, or if they’re more interested in the upfront fee.
Upfront business broker fees can vary from $5,000 to $50,000 or more, so this can be a significant incentive for someone to take on a new assignment even if they aren’t confident that they can sell it. If a business broker has already received payment for their services, your business may not get the attention it deserves.
Benefits of Paying a Broker After Your Business Is Sold
If you’ll only pay a fee following a successful transaction, your goal — selling your business — aligns more closely with that of the business broker or M&A firm — getting paid when the business is sold. This drives more motivation to sell your business.
Fees for an M&A Firm vs. a Business Broker
Business brokerage firms typically handle deals less than $3 million, and most don’t charge upfront fees. M&A firms often handle transactions of $5 million to $500 million or more. Firms that handle deals of $700,000 to $250 million or more are in the middle range, which involves both business brokerage firms and M&A firms. M&A firms typically charge upfront fees, and business brokerage firms usually do not.
Both firms will speak with the owner and learn more about your business, gathering details about your employees, customers, finances, and unique benefits and challenges. Then, they will recommend a potential selling price.
Typical business sale commissions are 10% of the sale price for companies priced at $1 million or less. For businesses priced over this amount, there’s usually a sliding scale with a lower percentage for larger deals.
The Cost of Marketing the Sale of Your Business
Business brokers will need to analyze information and draft documents to market the business. They will usually advertise the confidential overview document online, and potential buyers contact them from there.
Prospective buyers will typically be:
Individual buyers.
Private equity investors.
Company owners who are in the same or similar business and are looking to expand.
M&A firms and business brokerage firms receive similar types of buyers, but their marketing strategies often differ. This is why the cost of marketing the sale of your business can change between business brokers and M&A firms.
There are generally three ways to market a business for sale:
Creating a list of potential buyers to contact
Advertising the overview document on the internet
Contacting potential buyers who are already in the firm’s database
M&A firms usually use 1 and 3. Business brokers usually use 2 and possibly 1 and 3. We recommend hiring a business brokerage or M&A firm that will use all three methods.
Closing the Sale of Your Business and Paying the Fees
Finalizing a business sale involves a few key steps. The process ensures all agreement terms are met and that the transfer of ownership is properly executed.
1. Finalize the Purchase Agreement
It’s essential to review the purchase agreement carefully before signing. All terms should be clearly defined and agreed upon by both parties, including the purchase price, payment terms, assets included, warranties, closing date and any contingencies. Have your attorney review the agreement to verify that everything is accurate.
2. Prepare Closing Documents
Your attorney or M&A advisor can help you prepare all closing documents needed to finalize the transaction. These typically include:
Bill of sale to transfer ownership of assets.
Executed purchase agreement.
Regulatory permits or approvals, if applicable.
Any noncompete agreements.
Escrow arrangements.
Closing statements to summarize all financial transactions.
3. Ensure Legal and Regulatory Compliance
Some industries require regulatory approvals to complete transactions. Make sure all approvals are obtained and all required documents are filed before closing. Examples include complying with industry-specific licensing regulations or filing with the federal or state government for changes in ownership.
4. Establish Payment Structures
If the buyer is securing financing to purchase the business, confirm that the funding is in place before closing. Buyers may use loans, cash or a combination of financing methods. Make sure the funds will be transferred through secure methods, like wire transfers or escrow accounts. Consult with your advisor to ensure accurate financial agreements and payment schedules.
5. Transfer Ownership and Assets
This stage involves executing the necessary legal documents to transfer assets and ownership to the buyer. These may include real estate titles or deeds, IP assignments and inventory lists to confirm transferred assets. Once all documents are signed and funds are released from escrow, ownership of the business is officially transferred to the buyer.
6. Pay the Success Fee
Once the deal is closed, you will pay the fee for the services provided — known as the success fee, as we discussed earlier. This fee will be based on the sale of your business.
Tips for Finding the Right Business Broker
When selecting a broker to help you sell your business, it’s important to choose one who has worked with companies similar to yours, in terms of industry, products and services, and size. Essential factors to consider when choosing a business broker include:
Reputation and track record: Ask about the broker’s success rate, along with references and case studies of similar businesses they have sold. Consider how long the broker has been in business — a longer track record often indicates a deeper understanding of the market.
Industry specialization: Does the broker have experience with businesses in your specific industry? If so, they’ll likely better understand your company’s value drivers and prospective buyers. Additionally, consider whether they’ve previously handled similar-sized business transactions.
References and testimonials: Consult online reviews and testimonials for a better idea of the broker’s reputation.
Marketing strategy: Ideally, the broker has a comprehensive marketing plan to reach potential buyers, including online listings, targeted outreach and confidentiality measures. Also, does the broker have a network of qualified potential buyers? An extensive buyer network can help them market your business more effectively.
Communication style: Determine whether the broker is responsive and easy to communicate with. They should be transparent about their fees, processes and potential challenges and provide regular updates on the progress of the sale.
Here are some questions you can ask during a consultation with a potential broker:
Do you have experience with businesses of my size and type?
What is your experience in selling businesses in my industry? How many of these businesses have you successfully sold?
How will you market my business to potential buyers?
Why Partner With Synergy Business Brokers?
We provide the top-level service of an M&A firm without the upfront fee. Our team believes that having only a performance-based fee aligns our goals with those of our clients. By not charging an upfront fee, we can focus exclusively on clients whose price expectations we think we can meet. You can hear from our customers in testimonials and reviews and in our corporate video.