Gregory Caruso, Esq., CPA, CVA
Business Brokers go by many names, Business Brokers, Investment Bankers, Intermediaries, Acquisition and Merger Specialists. Business broker’s success fees or brokerage fees can be structured multiple ways but most are in the form of a back end commission. Business brokers work to sell your business while you work to maintain outstanding profitability during the sales period. This combination will result in the highest price. These people perform a variety of functions, usually anything not being done by another specialist.
Business broker’s primary goal is to increase the sales value and shorten the time on market of the business by determining the best buyer and be creating a large market of those buyers generating an auction environment when possible. The International Business Brokers Association estimates that Business Brokers on average add 15-20% to the value of a transaction. www.ibba.org.
Business brokerage fees tend to be a percentage of the transaction value and tend to fall as the transaction gets larger. Often there is also a minimum business brokerage fee. A common business brokerage fee structure for a small transaction might be the higher of a $15,000 minimum fee or 10% of the sales value. Sales value tends to include cash, liabilities assumed, non-competes, owner’s compensation. In effect, every way the seller is making money from the transaction. Commissions tend to be collected in full on notes taken back by the seller at settlement. If an earn-out is involved the commission will typically be paid as the money is received since it is speculative. In many cases the broker will barter a reduced fee on earn-outs for payment at settlement to simplify everyone’s accounting.
On larger transactions around $1,000,000 or more the minimum business brokerage fee might be $75,000 and a fee schedule of 10% on the first million, 8% on the second million, 6% on the third million, and 4% above that. This is known as the double Lehman. Very large transactions over $10,000,000 in sales value are completely negotiable. Just remember the important question is not what does the service cost you, it is who can help you make or keep the most money after paying all expenses.
Retainer or other up-front fees – On smaller transactions the broker might ask for $500 to $1,500 as a non-refundable retainer. We have never bothered on small deals but many brokers do. We generally figure we can give about 6 hours of time to understanding a prospective transaction i.e. understanding owner needs, a quick and dirty valuation, and a snap-shot market review.
Remember, even if the business broker does not charge an up-front fee they will request a six month to a year minimum sales period (we always ask for at least a year or more on transactions.) This is a lot of your time if you are stuck with an incompetent broker. Therefore, even though it is “free” if they don’t sell the business, make your choice wisely. For more complex businesses a retainer in the range of $15,000 for a valuation and business write-up is reasonable. We know several brokers who obtain between 10-20% of the total estimated fee as retainer either at the time of the listing or paid over the first six months.
For larger businesses with revenues over $20,000,000 it may cost $15,000 to $30,000 or more for the brokerage firm to really break apart the financials and understand what is going on with the business and the market. We know a quality broker that charges $5,000 per month for the first 6 months for his larger clients. If you are being asked to pay a large fee make sure you talk to satisfied clients. Do not let a broker use the cloak of confidentiality to tell you his clients are not accessible. Good business brokers have plenty of clients willing to talk to you. If they will not let you talk to past clients run, do not walk to the next broker. If the story is too good to be true, be careful also, stories of European (Asian this year) buyers for small local companies with limited internal management are just not plausible, (if you can’t take a vacation, how are they going to run it from half way around the world) especially at a value of two to three times current market value.
Depending on the transaction you are planning and the size and complexity of your business it may make sense to pay a large upfront fee. Unfortunately there are several firms, some backed by very well-known public companies that essentially take very large up-front fees, provide a great package, and then provide very little brokerage services while tying up the Seller. Bigger is often not better in business brokerage and intermediary services. Do your homework and hire the right broker at the right fee for your business sale.