There are two primary ways in which a business broker may charge their client, which are upfront fees and success fees. It is important to understand the fees your broker charges and choose the one that best fits your needs and payment preference. In this review, we highlight the differences between success fees and upfront fees when selling your company with the assistance of a business broker.
What are Success Fees With a Business Broker?
Success fees are paid upon the completion of the business sale. This is usually a percentage of the sale price. The exact amount is agreed upon when the business owner hires the broker for their services. A success fee can be in combination with upfront fees (see below) or they may be the only form of compensation for the business broker.
The percentage paid to brokers in the form of success fees varies. The broker’s experience and the size of your company may impact the percentage. On average, however, business brokers who work based on success fees make between 6% and 12% of the sale price. The standard starting point for success fees is 10%. In the event the business broker also charges upfront fees as well as success fees, the broker usually takes between 1% and 4% of the sale price.
The Advantages of Success Fees
Success fees are widely considered a more favorable option for business owners who are selling their companies. This is because the business owner does not pay the broker upfront. Additionally, they are not obligated to pay the broker if the business does not sell. As a result, the broker has great incentive and motivation to sell the company for as much value as possible, and they want to do so sooner rather than later if possible.
The Disadvantages of Success Fees
Some business owners may prefer paying upfront, and then keeping a higher amount from the sale. Therefore, a potential downside of success fees is that the seller gets less of the sale price. Specifically, the broker usually gets around 10% of the sale price, and the seller keeps around 90% (not including other fees associated with lawyers, etc.). However, brokers who are paid success fees often pay for themselves as they are more motivated to find a higher sale price for the seller.
What are Upfront Fees With a Business Broker?
Upfront fees are exactly as they sound. They are payments the business owner makes to the broker before they begin the sales process. Upfront fees are, in most cases, fixed prices paid by the business owner. The price can vary based on the individual broker and the size (and potential sale price) of the company.
On average, upfront fees range from $500 to more than $40,000. In some cases, business brokers who charge upfront fees may also take a percentage of the sale as well. If this sounds like a less desirable option for business owners, it is because it often is as there is less incentive for the broker to find a buyer for a maximum sale price (see disadvantages below).
The Advantages of Upfront Fees
In some cases, a business owner may be able to pay less overall through upfront fees. This is particularly the case if the company sells for more than the business broker initially anticipated. In other words, if a business owner does not wish to pay the broker approximately 10% of the final sale, then an upfront fee may be a way to reduce the overall cost. However, it comes at a much greater risk (see below), and the business owner may still pay close to 10% of the sale.
The Disadvantages of Upfront Fees
There are several concerns and issues with upfront fees. First, the business owner must have enough cash on hand to sell the company. Additionally, since the business owner has already been paid, there is less incentive for them to sell the company for a high sale price. This all too often leads to a sale below market value or the business not selling due to a lack of effort on behalf of the broker.
FAQs about Upfront Fees and Success Fees
It is best to have as much information as possible when you choose a business broker. Below are common questions about upfront and success fees that should help you better understand the payment types.
Should I Choose a Broker With Upfront Fees or Success Fees?
In general, success fees are usually preferred by sellers as they do not require a substantial payment upfront. In many cases, the seller does not pay the business broker at all before the company is successfully sold. Upfront fees, which are far riskier for the seller, are usually only preferred if the client has significant cash on hand and prefers to keep as much of the sale payment as possible.
Do All Business Brokers Charge Upfront Fees?
No. Many (if not most) experienced business brokers do not charge an upfront fee. This is because they are confident that they can and will sell your company and have no issue waiting until closing to receive compensation for their services. In far too many cases, upfront fees disincentivize the broker and lead to a significant financial loss for the business owner if the company does not sell.
What Does My Business Broker Mean by “Retainer Fee?’
A retainer is essentially the same as an upfront fee. It is a payment made upfront to the broker to reserve their time and services. It is a different way to refer to an upfront fee for the broker’s services.
Contact The Business Brokerage at Sigma Mergers and Acquisitions
With Sigma Mergers and Acquisitions, we work based on success fees and no upfront fees. This means you can trust us to sell your company for fair market value as we are invested in the sale as well. If you would like to get started with a free consultation and business valuation, then contact us today.