Business Broker Fees: How Much Are They, And Who Pays?

Who Are Business Brokers?

When you want to buy or sell a business, you’re looking for the best value possible. As a seller, you want the highest selling price; as a buyer, you look for the lowest price possible. Business brokers help you achieve the best value possible.

A business broker is a person or a firm that is an intermediary who helps owners sell their businesses. They do this through (1) conducting valuation for the businesses, (2) finding prospective buyers, (3) structuring potential financing when necessary, and (4) helping them close the deal. 

Why Should I Hire a Business Broker?

Business brokers become the navigating tool in your unique and complex path toward buying and selling a business. Not hiring a business broker could cause damage to your business in the sale process through various issues such as: 

• Mis-pricing the business 

• Not dedicating sufficient time to marketing your business

• Not knowing how to qualify buyers 

• Getting distracted by running the business

Non-professionals such as real estate agents often need more resources or networks to sell a business and close the transaction properly. Conversely, broker firms are usually comprised of agents who specialize in companies that belong to specific industries or possess unique characteristics. As a result, they not only ensure that business owners get the best value possible, but they also guide you through various tasks that save you time and, potentially, money. 

What are the Tasks of a Business Broker?

Depending on the size and complexity of your business, a broker may have to do some or all of the following tasks:

Create a Business Assessment and Valuation

The broker uses your business’s operational and financial details to prepare business valuation and marketing documents. These result in a Broker’s Opinion of Value, commonly known as the “Most Probable Selling Price.” Official appraisals, known as Certified Business Valuations, are done by certified valuation analysts. 

Determine a Deal Tax Structure

The broker determines the best way to structure your business for the least tax liability toward you (See: Tax implications of buying a business).

Develop a Confidential Marketing Strategy

These strategies could include conducting industry-specific research to find the best buyer prospects for your business, conducting direct mail and phone marketing campaigns to reach out to prospects, and advertising your business through listing websites and business publications. ‍

Put together a Data Room

Brokers also help you develop documents that you will need to attract and vet buyers and ease the sale transaction process. Some documents include an executive summary, a confidential information memorandum, and a transition plan.

Conduct client meetings

Brokers will conduct meetings with you on a regular basis to communicate any progress on the sale as well as discuss any questions or concerns you might have. 

Pre-Qualification of Buyers

Some brokers will have already vetted all buyers that are presented to you, and reviewed their financial information. This saves you a significant amount of time from talking to unqualified buyers. 

Prepare for Buyer Meetings

Brokers help you prepare and strategize for meetings with potential buyers that they have organized to ensure you get the highest value for your business.

Review offers

The brokers present you with the best sale price for your business and help you review and discuss these offers. They also manage any form of negotiations from all third parties, including attorneys and accountants. 

Due Diligence

Brokers conduct an extensive review of all documents and prospective buyers. They also help you plan and coordinate meetings with attorneys and accountants to conduct any due diligence necessary. 

Closing

The broker will help you review closing documents and find an attorney for the closing process.

How Much Do Business Brokers Charge?

Business Broker’s commissions often vary depending on many different factors. However, the most significant factor in the cost of a broker is the size of the business. 

Brokers can also charge clients varying types of fees:

Retainers – Flat fees buyers pay as one upfront payment or as a monthly charge. Middle Market M&A firms can charge between $15,000 to $30,000. 

Valuation Fees – A flat fee for conducting a business valuation. They can cost between $7,000 to $20,000, depending on the firm's size.

Success Fee (commission) – A percentage fee on the sale of your business that is paid once the deal is closed. 

Minimum Contract Length – Most brokers will require you to sign a minimum contract of 6-12 months. These contracts can have large fees for clients that want to step away from the contract.

Business can be divided into three different size categories:

Main Street Business: ~$1M in revenue 

Main Street businesses often have the least complex transactions. These businesses are usually handled by “Main Street” brokers who do not charge any upfront or retention fees. In some states, they are legally not required to charge you any upfront or retention fees. 

Main Street brokers charge 10% to 12% of the business's value and an additional 6% on any associated real estate. Often, these brokers also have a minimum commission fee ranging from $10,000 to $20,000. 

Lower Middle Market: $1 million - $25 million in revenue 

In this size category, some brokers may potentially charge retainers and most commonly have a minimum commission fee ranging from $35,000 to $50,000. 

Lower Middle Market brokers can often charge their clients using two methods: the Double Lehman Scale and a flat commission. 

The Double Lehman Scale– The more frequently used method, the double Lehman scale, originated from the Lehman Brothers. In this method, the charges to a client are made in stages:

• 10% on the first million, plus

• 8% on the second million, plus 

• 6% on the third million, plus 

• 4% on the fourth million, plus 

• 2% on any remaining amount. 

A flat commission—Sometimes, broker firms charge a flat commission of 4-6% on the total purchase price of the business. 

Middle Market Mergers and Acquisitions: Over $25 million in revenue

At the Middle Market M&A level, you can hire a middle-market advisor, a merger and acquisitions firm, or approach an Investment bank. At this level, retainers are common, ranging from $5,000 to $15,000 upfront or in monthly payments. 

Middle Market advisors and Investment Banks can charge a flat fee anywhere from 1-4% or a variation of the Lehman formula for administering the sale of your business. As the sale price of your business increases, the percentage charged by advisors and banks decreases. In some cases involving large companies, you could be charged less than 1% when the sale price is extremely large.

Who Pays the Broker's Fee?

Almost always, the Broker’s fee is paid by the seller. Additionally, if the buyer was introduced to the business by a different brokerage, the commission would be divided between the buy-side and the sell-side brokerage on a 50/50 basis—a concept called co-brokerage.

Are Broker Fees Tax Deductible?

Broker fees are listed under transaction fees within the IRS. As of this writing, the IRS will not allow you to write off any form of a transaction fee. 

Looking to sell your business? Connect with our Operator Network to meet experienced operators who are looking to buy a business.

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.