Selling a business can often be an overwhelming process. It can take a lot of time and money to get your business ready for sale, and there’s often no guarantee that you’ll get the price you want. That’s why many small business owners choose to work with a business broker when they are ready to sell.
There are pros and cons with using a business broker to sell your business. A business brokerage provides the expertise, insight, and knowledge that can help you maximize the value of your business and make sure you get the best deal during a sale process. But, not all business brokers are created equal, and many can be expensive. Plus, if you have experience selling businesses and don’t want to lose control of the sales process, you may want to go at it alone.
Before you decide to use (or not to use) a business broker, it’s important to understand it costs to hire one. Let’s take a look at the costs associated with working with a business broker, including pricing and fees.
What is a business broker?
A business broker assists in the buying and selling of businesses. Most business brokers will work with the business owner to assess the value of the business and find prospective buyers. They will also negotiate the terms of the sale and help to finalize the transaction.
For sellers, a broker can also assist with negotiating the terms of the purchase and provide advice throughout the due diligence processes. Business brokers can play an important role in helping owners sell their business, and their services are typically used by owners who do not have the time or expertise to sell their business themselves.
What does a business broker do for me during a sale?
The process of selling a business can be time consuming and complex, especially if you’re focused on running your business.
Business brokers should help to simplify the selling process and ensure that owners receive the best possible price for their businesses. Business brokers also can help to find buyers for businesses that are not actively on the market. If you are considering selling your business, working with a business broker can be a great way to maximize the value of your business and ensure a successful sale.
How do Business Brokers determine what to charge?
Business brokers are often asked how they determine their fees. The answer can vary depending on the broker, but there are some common factors that influence how much a broker charges. One important factor is the structure of the deal.
For example, M&A offices typically charge a lower fee for simple transactions, such as the sale of a single business. More complex deals, such as company mergers, tend to come with higher fees.
Another important consideration is the stage of the transaction your business is in. Business brokers typically charge a higher fee for conducting an initial assessment of a business and developing a confidential marketing strategy. If the transaction progresses to due diligence and negotiation, the broker's fee will usually increase. Ultimately, business brokers use a variety of factors to determine their fees, and each case is unique.
The more experience and success a broker has, the more they can typically charge. Some questions you should ask your broker to determine how much they charge include:
- How many businesses have you sold in my industry?
- How long have you been selling businesses?
- How long did it take you to close your recent transactions?
- How many transactions have you closed?
- What is your success rate?
Can I negotiate business broker fees?
Many people believe that business broker fees are set in stone, but there may be room for negotiation. The first step in negotiating is understanding a business broker’s standard fee structure. Most brokers charge a commission based on a percentage of the sale price, typically between 10 and 20 percent.
Some brokers may be willing to lower their commission if they feel that they will have difficulty finding a buyer. In addition, brokers may be open to negotiating their fee structure based on the unique needs of the client. For instance, some clients may want to pay a higher up-front fee in exchange for a lower overall commission.
Ultimately, the best way to negotiate business broker fees is to have an open and honest conversation with your broker about your budget and your expectations. By taking the time to understand each other's needs, you'll be in a much better position to reach an agreement that works for both parties.
How much does a business broker charge to sell a business?
Business brokers typically charge between 10 to 20 percent of the total sale price as their fee for services. This fee is usually collected at the closing of the sale and is often split between the buyer and seller.
For example, if your company sells for $100,000, then you would expect to pay somewhere in the range of $10,000 to $20,000 in broker fees. This fee is typically nonrefundable, but it may be negotiable, depending on your situation.
Standard Business Broker Fees
Instead of working off commission, some business brokers will charge either an hourly rate or a fixed fee for their services. An hourly rate is typically between $50 to $300 per hour, depending on your broker’s experience level and geographic location.
Other brokers will offer some type of package deal for their services, which is charged regardless of how long it takes or how much work is involved in selling your business. There may be other expenses a business broker charges, such as legal fees, accountant fees, and marketing costs. These fees are typically not included in most standard packages offered by brokers.
These additional expenses can add up quickly, so it's important to factor them into your budget when calculating overall costs associated with selling your business. It's also important to note that some brokers may offer additional services such as consulting or market research, which could incur additional costs as well.
Baton versus other business brokers
Another way to manage the sale of your business is through Baton. We give you many of the benefits of using a business broker before you decide if you actually need one. We offer business owners a free certified business valuation estimate based on verified financial data. We even track your business data over time, so you can see your progress and compare it to competitors.
Baton’s online marketplace of businesses for sale can be a great choice for buyers on the hunt. Owners get matched with qualified buyers and decide if they want to engage. We don’t only help sellers find quality buyers; we also provide buyers with free resources to learn the best practices around sourcing and acquiring small businesses.
We also provide the business owners with personalized advice to help them maximize the total value before they decide to sell. Plus, we manage a sale for only 6%, much lower than the average business broker price. Whether you’re ready to sell or just looking at your options and planning for the future, Baton can help you navigate the choices and see how much your business is worth today.
What are Success Fees and Monthly Retainers?
A success fee is a common fee structure used by business brokers. In a success fee arrangement, the broker only receives a commission if the sale of the business is successfully completed. This provides an incentive for the broker to get the best possible price for the business, as their own earnings are directly tied to the sale price.
Monthly retainers are another common fee structure used by business brokers. In a monthly retainer arrangement, the broker receives a fixed monthly fee from the business owner, regardless of whether or not the business is sold. This provides stability for the broker, as their income is not directly tied to the sale of the business, though it may not incentivize the broker to sell the business as quickly as possible.
Both success fees and monthly retainers have their pros and cons, and it ultimately comes down to what makes sense for both the business owner and the broker. With success fees, the owner only pays if the business is sold, but there is more risk for the broker. With monthly retainers, the owner pays regardless of whether or not the business is sold, so there is less risk for the broker.
The difference between upfront fees versus Post Sale Fees from Business Brokers
Some business brokers charge upfront fees, while others charge post-sale fees. Upfront fees are typically charged as a percentage of the asking price for the business and are paid after the owner goes into an agreement with the broker. Post-sale fees, on the other hand, are typically charged as a percentage of the final sale price and are paid after the sale is completed. There are pros and cons to both upfront and post-sale fees.
Upfront fees ensure that the broker is compensated for their time and effort if the sale does not go through. Post-sale fees may provide more incentive for the broker to sell the business quickly, but they also may mean the broker will try to sell your business for a lower price . Whether a broker decides to receive fees upfront versus post sale is often up for negotiation and should be part of your initial conversations with a broker.
Should I pay upfront for selling my business?
Another important consideration is whether or not to pay your broker upfront to sell your business. There are a few different factors to consider when making this decision.
First, you need to think about the value of your business and how much you are willing to sell it for. If you feel that your business is worth a significant amount of money, then paying upfront may be the best option. This way, you can ensure that you get the full value of your business.
Benefits of paying a broker after your business is sold
Another factor to consider is the timing of the sale. If you want your broker to sell your business quickly, then paying upfront may not be an option. Finally, you need to think about the risks involved in paying upfront. If the broker doesn’t find a buyer for your business, then you could lose money.
Choosing to pay your broker up front or after your business is sold depends largely on your incentives. Paying upfront lessons the incentive to sell your business, while paying commission or success-based fees increases the incentive to sell.
Difference in Fees for an M&A firm vs. a business broker
When selling a business, there are two main options: working with an M&A firm or working with a business broker.
M&A advisors generally work with middle market businesses and make money through retainers or fees based on a percentage of the deal. At the beginning of their contract, the seller may commit to a fixed retainer. Some M&A firms invoice monthly throughout the transaction and credit the fee against the success fee after the deal closes.
M&A advisors typically don't advertise their mergers and acquisition fees. Generally, the larger the deal size, the smaller the M&A fee. Apart from the retainers or work fees that may range from $50k to $250k paid as monthly consulting fees, the sellers also incur the following success fee based on deal size. An example of a structure below:
- Deal size from $1 million to $5 million: 12% to 8% success fee
- Deal size from $5 million to $25 million: 7% to 4% success fee
- Deal size from $30 million to $100 million: 2% to 4% success fee
Learn more about how M&A brokers and firms structure their fees.
M&A firms typically charge higher total fees than business brokers, but they also have access to a larger pool of potential buyers. Business brokers, on the other hand, typically charge lower fees and have more experience working with small businesses. However, they may not have access to as many potential buyers.
Who pays the business broker fee?
In most cases, the seller will be responsible for paying the broker's fee, which is typically a percentage of the selling price. However, there may be some circumstances in which the buyer agrees to pay the fee, so it's important to discuss this with your broker before entering into any agreements.
Are broker's fees tax deductible?
Broker’s fees are considered transaction fees when selling a business, and are therefore not tax deductible via the Tax Cuts and Jobs Act of 2017.
However, there may be other expenses associated with the sale of the business that are tax deductible. For example, if you hire an attorney to help with the sale, their fees may be deductible. Additionally, any costs associated with preparing the business for sale, such as repairs or renovations, may also be tax deductible. It’s important to speak with a tax advisor to determine what expenses incurred during the sale of a business may be tax deductible.
Hiring a business broker can be an invaluable asset when selling your small business, but it does come with some costs associated with it. Business owners should carefully consider all of their options before deciding to hire a business broker in order to ensure they get the best value out of their investment.
Baton works with experienced brokers is more cost efficient than hiring a traditional broker yourself - we charge 6% or less . Wherever you are in your selling journey, we’re here to help. Even if you aren’t considering selling at all and simply want access to partners to help you think about how to organize your business around some of these ideas – you’re in the right place. Get started with Baton today.