When it comes to the sale of a business, there are a number of costs – both expected and unplanned – all business owners should understand before they agree to sell their business.
A few of our Featured Advisors have weighed in, offering their expertise and perspective to explain the costs – from business broker fees and legal costs to hidden fees – as they relate to selling a business.
Before we dive in, it’s worth taking some time to clarify some of the titles and terminology that are important for business owners to understand in the context of selling a business.
Business Broker vs. MA Advisor vs. Investment Banker
In this post, we’re using the title Business Broker meaning the person who serves as an intermediary between the business owner (seller) and potential buyers.
While the title Business Broker is appropriate for those who represent sellers in the Main Street Market with revenue under $1M, typically intermediaries working in the Lower Middle and Middle Market assume the title of MA Advisor and Investment Banker, respectively.
Business Broker Fees and Other Business Sale Expenses
Every Business Broker, MA Advisor and Investment Bank has its own method of charging clients for their services. However, because their fee is typically tied to the business’ Enterprise Value, their respective fees are relatively similar for a given transaction. This doesn’t mean you shouldn’t compare fees. By all means do so and be certain you understand the terms in their listing or engagement agreements. Those vary widely and can be very tricky to navigate.
Generally speaking, the majority of the fee paid to a business broker will be paid when the sale actually closes. For this reason, the fee may be referred to in your listing or engagement agreements as a Success Fee. It’s not unusual for a minimum success fee to be defined in the listing agreement or engagement agreement, especially for smaller deals.
That said, prior to the sale closing, the business owner is likely going to incur certain expenses with their business broker along the way. Almost all sellers will be expected to pay an upfront valuation and/or marketing fee. And it’s not unusual for business owners to be required to pay a monthly retainer fee for their MA Advisor or Investment Banker. Frankly, this is one way business brokers determine if a business owner is truly prepared and willing to sell their business. Without some skin in the game, many business owners would waist business brokers’ most precious resource – their time.
We’ve got another post covering the Lehman Formula used to calculate the business sale success fee paid to the business broker here.
Exit Promise Feature Advisors Greg Younts, e Dougan have provided answers to some of the most frequently asked questions regarding fees and expenses associated with selling a business.
Greg Younts comments that his firm represents sellers that range in size from $500K to over $100 MM in annual revenue. Typically, for the larger businesses, more work is required from the broker in terms of valuing the business, assisting the business owner in getting prepared to sell their business, developing and implementing a marketing strategy and the materials that will be used to market the business, and in negotiating with buyers and closing the sale.
For a small business, our broker commission is typically 10% of the sale price of the business. The upfront fees required to value, market and sell the business range form $1,000 – $2,500.
For a larger middle market company. The upfront fees for the required services can range from $2,500 – $25,000+. The broker’s commission can range from 3% to 10% of the total sale price. The time investment for a broker in the larger transactions can be several weeks to 2+ months.