One of the most frequently asked questions business brokers receives is in regard to how much they charge for their services. This is important to understand as it helps you plan your exit strategy and choose the right business broker. In this review, we discuss how much business brokers charge, the various types of broker fees, and more.
What is a Business Broker?
A business broker serves as an intermediary between a seller and a buyer during a business sale. They play an integral role in ensuring their client (which can be either the seller or the buyer) receives a fair deal. Specifically, during a business sale, a business broker may:
- Provide a market-based business valuation
- Assist the seller with planning their sales strategy
- Find a buyer in a confidential manner
- Monitor negotiations and contingency planning
- Help ensure smooth and successful due diligence and closing processes
A broker may use non-disclosure agreements (NDAs), confidential information memorandums (CIMs) and other methods to protect the privacy of the sale. They often have access to databases, networks, and connections that allow them to help sellers find a buyer who meets their terms and pays fair market value.
The Different Types of Business Broker Fees
There are various ways in which a business broker gets paid. Some brokers require upfront payments before they begin selling the company. In other cases, business brokers may work based on commission. This is known as a success or contingency fee. In some cases, the broker may also charge a fee for the professional business valuation. Below is a closer look at each type of business broker fee.
Upfront Fees
Upfront fees are paid before the business broker starts the sale process. These fees can vary in price, depending on the specifics of your company and the individual broker you choose. Some business brokers may charge upfront fees as well as success fees (see below).
So, how much do business brokers charge upfront? Business brokers who require a payment upfront usually charge between $500 and more than $40,000, depending on the anticipated sale price. The good news is there are many brokers who only work based on success fees, which minimizes the initial risk for business owners who are planning and executing their exit strategy.
Success (Contingency) Fees
Success fees, also called contingency fees or commission fees, are payments made to the business broker after the successful completion of the sale. This is usually in the form of a percentage of the sale. In most cases, this fee percentage is between 6% and 12%; a standard starting point is 10%. However, the broker may charge more depending on the size and other specifics of the company. Success fees are of little risk to the business owner as they only pay once the business is sold.
Valuation Fees
Some business brokers also charge a valuation fee. This means the business owner pays a fee for the business valuation. In some cases, a business owner may need a professional valuation if they are not intending to sell. For instance, they may need a valuation to settle an ownership dispute between their business partners. In this case, the broker would charge for the valuation. However, many brokers waive this fee if the business owner chooses them as their business broker. Other brokers offer free professional valuations.
FAQs About Business Brokerage Fees
Below are answers to frequently asked questions business brokers receive about their fees. This additional information should help you prepare for the sale of your company. However, the best way to get more information is to speak directly with a business broker.
What is The Average Contract Length with Business Brokers?
Many brokers use contracts. This gives them time to find a qualified buyer without the seller backing out of the agreement. The average contract length with business brokers ranges from 6 months to 12 months.
Who Pays The Brokerage Fee?
In most cases, business brokers represent the seller (the business owner). In this case, the seller would pay the brokerage fee. For success fees, this is paid once the business sells. For upfront fees, this is either paid before the broker begins working or throughout the sales journey (usually in the form of retainer fees).
Does The Size of My Business Affect The Pricing Model?
Some business brokers offer a flat rate regardless of the size of the company. As mentioned, the standard rate for success fees is 10% of the sale price. However, the size of your company may play a role in the success fee rate. For instance, many business brokers use what is known as a Lehman formula, which follows a rule similar to this:
- 10% of the first $1 million involved in the transaction
- 8% of the second $1 million
- 6% of the third $1 million
- 4% of the fourth $1 million
- 2% of everything thereafter (above $4 million)
This is far from a hard and fast rule, however. Every business broker is different, and their pricing model based on the size of the business varies. This is why scheduling a consultation is important when choosing a broker.
What if I am Including Real Estate in The Business Sale?
Business brokers are required to have a real estate license in many states. This ensures they understand real estate laws and are able to legally include real estate in the sale without any complications. In states where a real estate license is not required, such as Texas, the business broker may need to work with a real estate agent if they are not licensed themselves. In some cases, particularly when the real estate is leased and not owned, the property may be considered “incidental.”
Sigma Mergers and Acquisitions Helps You Sell With Confidence
Our business brokerage here at Sigma Mergers and Acquisitions has decades of experience and has helped more than 600 business owners sell for fair market value. We also work based on success fees, so you never have to worry about upfront costs when you choose us. Contact us today to get started with a free, no-obligation consultation.
