Business brokers are helpful in selling your business for the right amount. They support the seller in various ways, like collecting your financial statements, assessing your business’s value, creating interest in your business, and finding someone to buy it. They can also make the selling process quicker by handling the necessary checks and balances and helping with the final steps. Business brokers usually work with small businesses, those making less than $5 million that are sold to one person, similar to how a real estate agent sells a house.
Quite often, when a business owner decides to sell their business, one of the deciding factors when it comes to choosing a business broker or intermediary is what fees they charge? Business broker fees and commissions can vary depending on several factors, including: the size and type of business being sold, the location, and the specific services provided by the broker. Charges, work fees, retainers, up-front fees, or marketing fees need to be reasonable based on the work that is actually being performed. Be sure to understand everything the business broker or intermediary is willing to do for you.
The following is a breakdown of the most common fees:
Commission
Business brokers typically charge a commission as a percentage of the final sale price of the business or transaction value. The commission can range from 5% to 12% or more, but the industry standard is around 10%. For larger businesses, the percentage may be lower, based on a descending scale percentage per million in transaction value. For example x% for the first $5 million in transaction value and a lower percentage for each incremental value after that. Always make sure to understand the commission structure and how it’s calculated before you decide to work with a business broker or intermediary.
Upfront Fee
Apart from the commission, some business brokers may chargeupfront fees for their services. These upfront fees could be for various things, such as listing fees, marketing expenses, or retainer fees. . It’s important to be clear about what exactly these fees cover and that they are a reasonable amount for the work being done.
One good thing to know is that some brokers might deduct a portion of the upfront fees you’ve already paid from the commission when your business is sold. But not all brokers do this, so it’s something to ask about before you start working with them. Being clear about these fees and how they’re handled can save you from any surprises later on.
Valuation Services
Sometimes, business brokers might offer to help determine how much your business is worth. This process is called business valuation. This is done to determine the fair market value of your business. Consideration is given to how well your business is performing, its assets, and its potential for making money in the future. However, this valuation service may come with a separate fee or it may be included in the final commission. It’s essential to talk to the broker about how they handle this service and what it means for you. Knowing if it’s included in the commission or if it’s an extra cost can help you plan better and understand what you’re paying for.
Retainer Fee
Retainer fees are sometimes needed by business brokers at the start of their work. This fee acts like a kind of deposit, showing that you’re serious about selling your business and that you’re committed to working with them. They use this money to cover their initial costs and efforts.
The good thing about these retainer fees is that they often get subtracted from the final commission or success fee when your business is finally sold. It’s essential to understand how this works before you agree to it, so there are no surprises later on. Make sure to talk to the broker about the retainer fee and how it gets adjusted later, so you have a clear idea of what you’re paying for.
Success Fee
A success fee is what brokers get when they achieve a particular goal that’s been set beforehand. It’s a bit like a bonus for them, but they only get it if they do what they promised. This fee is like a special kind of commission that they receive when they meet a specific condition, not just when they sell your business.
Sometimes, this success fee might not be connected to the actual sale of your business. For instance, the broker might ask for a certain amount as a success fee if they manage to sell your business within a particular period of time. This means if they’re able to find a buyer and close the deal within the set time frame, they’ll get this extra fee as a reward. It’s important to understand what these conditions are and what the broker expects to do to earn this fee. Talking about this before you start working with them can help you both be on the same page and avoid any misunderstandings later.
Negotiating Commission Rates
When it comes to the commission rates that brokers charge, it’s often possible to discuss and agree on a rate that works for both you and the broker. This means you can talk to the broker about what you think is a fair amount for them to get when they sell your business. It’s like finding a middle ground that suits both of you.
Before you sign any official agreement, make sure you have a clear conversation with your potential business broker. This is important so that you both understand what’s expected from each other. Make sure you know exactly how much they’ll get and what they’re supposed to do for that amount. Having this understanding from the beginning can prevent any confusion or disagreements later on. So, don’t hesitate to talk about the commission rates and make sure they’re agreeable to you before you finalize anything.
Additional Costs
Apart from the money you give the broker, there are other costs you’ll have to think about when you sell your business. These could include money for a lawyer to help with any agreements such as a letter of intent or a sale purchase agreement, an accountant to go through your finances, and other closing costs when you’re finalizing the sale. It’s important to remember these costs and include them in your overall budget. This way, you can figure out how much money you’ll actually get when everything is done.
Industry Specialization
Some brokers are experts in certain types of businesses, like healthcare, technology, or restaurants. These specialized brokers might ask for different commission rates based on how much they know about that specific industry. This means they might charge more if they have a lot of experience in selling businesses like yours. It’s good to know about this so you can choose a broker who understands your type of business well.
Contract Terms
Before you agree to work with a broker, make sure you read and understand the contract. Look carefully at things like how long you’ll be working with them, what happens if you want to cancel the agreement, and if they have exclusivity to sell your business. Understanding these terms can help you avoid any problems later on.
Geographic Location
The fees and commissions charged by business brokers can vary significantly depending on the location and the local market conditions. Larger cities with more businesses for sale may have higher commission rates.
Do your homework! It’s essential to thoroughly research and interview potential business brokers or intermediaries, request references, and review their track record and reputation prior to making a decision. A transparent and fair fee structure, along with a well-defined contract, will help ensure a successful and mutually beneficial working relationship.
Partner with Robbinex
Robbinex is more than a business broker. We are specialized and focused on looking after all transitional and transactional needs of mid-sized business owners. This specialization and focus allow us to be more responsive to our clients and to build trusting relationships. We have accumulated knowledge based on almost five decades of experience and approximately 450 closed transactions.
Author: Robbinex
