- Which is Best – Business Broker, M&A Advisor, or an Investment Banker? - October 2, 2023
- How To Find A Business On Sale - August 16, 2023
- Why Business Buyers Won’t Buy Your Business - June 26, 2023
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Note — This post has been updated on 10/29/2021.
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. M&A 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 M&A Advisor and Investment Banker, respectively.
Every Business Broker, M&A 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.
Success Fee and Monthly Retainers
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 M&A 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.
With these titles and terminology out of the way, let’s move into our interview.
Exit Promise Feature Advisors Greg Younts, Mark Fazio, and Kwame Dougan have provided answers to some of the most frequently asked questions regarding fees and expenses associated with selling a business.
How much do business brokers charge to sell 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.
Regardless of the size of the transaction, the fees we charge upfront are typically fully credited to the broker’s commission that is due at closing.
In some cases, our clients prefer a consulting arrangement in which we charge per hour for our services. This is a good option for the business owner that may not need our full range of services, and would need our help on a limited basis and possibly for a limited time.
Why does a business broker fee differ from one broker to another?
Greg points out that the type and quality of services provided vary greatly from one broker to another. And, the size and types of businesses represented by a broker vary. It is critical that the business owner selects a broker with the experience and expertise to represent their size and type of business.
The business must be marketed by a broker in a manner such that the business will stand out as a good acquisition candidate with buyers who are looking at other similar businesses for sale. The business owner must be prepared to pay a reasonable fee to engage with the right broker that will provide the necessary services to ensure the best possible result in the sale of the business.
Are business broker fees negotiable? If so, how would I negotiate it?
Greg explains that fees are negotiable in some cases. The best way to negotiate is to get proposals from at least three reputable brokers that can meet your needs. If a broker knows they are competing against other strong brokers for the contract to represent the business, they may be willing to reduce their fees for certain services.
For larger businesses, top business brokers will typically provide a custom proposal for their services. The business owner needs to have a clear understanding from a broker in terms of the type and quality of services they will receive in the contract. The type and quality of services must be at a level such that the business will be marketed by a broker in a manner that will make the business stand out against other similar businesses on the market. And, the broker should use a strategy to identify and attract the best possible buyers for the business. Negotiating the broker contract is as much about finding the right broker providing the right services as it is about fees.
How do Business Brokers determine what to charge?
Greg describes that the broker’s fees are typically based on the size of the business, and services and time investment that will be required to sell the business.
Services typically include a business valuation, assisting the business owner in getting prepared to sell the business, developing and implementing a marketing strategy and the materials that will be used to market the business, meeting and negotiating with buyers, and working with a buyer through due diligence, the contract process and close of the sale.
The services and time investment required to sell a business varies greatly depending on the business and challenges that might be unique to selling a particular business. The broker should explain in detail what they anticipate will be involved in the sale process and the time investment that will be required by the broker and business owner.
What do Brokers do when they represent me in the sale of my business?
Greg comments that his firm provides the following major services and possibly more in a typical business sale:
A. Business Assessment and Valuation
- Collect operational and financial details on the business required for a business valuation and to prepare marketing documents
“Broker’s Opinion of Value” or “Certified Business Valuation”
B. Buyer Analysis – Define the likely buyer – individual, company, private equity group, etc…
C. Financing Analysis
- Possible financing options for the likely buyer
- Determine if the business is “Financeable” by a financial institution
D. Deal Structure – What is the best way to structure the sale to minimize tax liability?
E. Develop the Confidential Marketing Strategy. Possibilities include:
- Public Advertising such as business listing websites, business publications, periodicals, trade journals, etc… that will provide exposure to buyer prospects
- Industry research to identify strategic buyer prospects
- Direct mail and telephone marketing campaign to proactively contact best buyer prospects
- Network with buyers, business owners and other business brokers
F. Develop Marketing Documents
- Executive Summary – Brief summary of key operational and financial highlights of business
- Confidential Information Memorandum (the CIM) – Full presentation of the business profile, operational and financial information to provide qualified buyers with the information required to properly evaluate the business as a possible acquisition
- If the transition and training issues are significant for the buyer(new owner) acquiring the business, may want to include a formal transition plan to show the buyer exactly what to expect and the owner’s commitment to make sure the buyer is successful as the new owner.
- Business Listing Advertisement – Advertisement for business listing websites
G. Bi-weekly progress reports and strategy meetings to discuss the status of the marketing campaign. If buyer interest is not strong, do we change the marketing strategy?
H. Pre-qualify all buyers to confirm they are financially qualified and have the background, skills and experience required to successfully manage the business.
- Resume or profile
- Background check
- Net Worth statement
- Buyer Confidentiality Agreement
I. Coordinate, plan and participate in buyer meetings
- Prepare business for buyer meetings
- Review buyer profile with business owner and determine meeting agenda and strategy
- Prepare for questions to anticipate from buyer and determine key points to present on business
- Further qualify buyer face-to-face
J. Review and discuss offers to acquire the business
- Manage buyer negotiations
- Prepare and present counter-offers
- Manage negotiations and communications between all third parties – attorneys, accountants, buyer’s broker, etc…
K. Assist buyer in finding third party services if they do not have representation
- Financing, tax, legal, accounting, etc…
L. Due Diligence
- Due diligence checklist – Work with buyer to develop the list of items and documents that should be reviewed and verified
- Plan and coordinate meetings with buyer and third parties in due diligence – attorneys, accountants, landlord, etc.
- Manage the transfer of documents and information between buyer and seller, and third parties
- Coordinate closing attorneys and wire instructions for the sale
- Review closing documents prior to closing
- Close the sale
Greg goes on to say that typical costs involved in any business sale include fees for services provided by the broker, attorney and CPA. The attorney and CPA fees could be significant if there are significant legal matters that need to be resolved or significant clean-up of financial books and records required.
Their possible costs could be for a business appraisal or machinery & equipment appraisal, if appropriate for a business. A broker can tell you if these services would be beneficial in the sale of your business.
If real estate is included there could be a need for an EPA environment assessment of the property, survey or real estate appraisal.
The time investment is typically significant for the business owner, especially in the due diligence and contract process. A major responsibility of the broker is to relieve the business owner of much of this workload, but the owner will still invest significant time in the process.
- Kwame Dougan adds that at a minimum, a good full-service broker does the following:
· Deep dives into your business
· Prepares written sales materials
· Identifies potential buyers and/or joint-venture partners and/or strategic investors that could have an interest in your company
· When an offer comes in, the broker helps you understand and negotiate all aspects of a proposed transaction
· After the letter of intent is signed, the broker manages the due diligence process for you.
What are the legal costs of selling a business?
Mark Fazio points out that the legal costs of selling a business can vary based on factors such as the structure and complexity of the transaction, the risks associated with the business, etc. Many law firms simply bill seller-clients by the hour, but many firms are trending towards offering “alternative fee arrangements” including fixed fees, volume discounts, retainers, collars, phased billing, blended hourly rates and success fees.
Greg goes on to say that legal costs vary greatly depending on the size of the transaction. For a small business valued at $1 MM or less, total legal fees are typically between $5,000 – $12,500.
For a larger M&A transaction, legal fees can range from $10,000 – $50,000+.
A broker can recommend attorneys that are experts in business sales and know how to work with the buyer’s attorney to resolve differences and protect the business owner’s interests while keeping legal fees from becoming excessive.
Are their other hidden costs associated with selling a business?
Mark explains that other hidden costs may include:
- Severance payments to employees not retained by Buyer
- Prepayment penalties associated with paying off indebtedness of Seller
- Transfer or similar taxes
Kwame also explains that you might sacrifice peace of mind without good counsel. For instance, a seller may disclose too much information without necessary protections in place and it costs them dearly; or that same seller may NOT disclose enough information, and spend years fighting a lawsuit.