How Much Does a Business Broker Charge to Sell a Business?
The sale of a business along with negotiations is indeed complicated. For many businessmen and business owners, when made easy by professional business brokers, that may help most get over the hurdle. However, most entrepreneurs always wonder about the question of how much brokers charge to sell a business. This is an important question since the commission of a broker might increase up to significantly influencing the returns of the overall sale transaction. In this article, we discuss How much do Brokers charge to sell a business .
What Is a Business Broker?
- Now that we have understood who a business broker is and what he does, let’s move on to how much brokers charge to sell a business. A business broker is a professional intermediary who helps in the sale and purchase of businesses. The role of the broker is to guide the buyer and seller through the process by providing services like business valuation, marketing, negotiation, and paperwork management.
- The role of a broker is especially vital to smaller and medium-sized businesses which usually lack time, expertise, or resources to sell the business by themselves. They have ready lists of potential buyers and most of the time make selling business, sometimes at better prices and easier deals.
Types of Broker Fees
Now that we understand what a business broker does, let’s talk about how much a broker charges to sell a business. Broker fees fall into two broad categories: commission-based fees and fixed fees.
1. Commission-Based Fees
- Most agents are charging a selling commission for the sale of the business. The commission is charged as a percent of closing the selling price for the business. It all differs in between 5 to 12 percentage points from case to case, depending on what it takes, what type, and what size or complexity transaction in hand.
- For example, if a business is sold for $1 million and a broker charges a 10 percent commission, he or she would have earned $100,000. Again, in terms of commission, how much brokers charge to sell a business differs widely. Again, it can be more for a smaller business but less for a bigger or even more established businesses.
2. Retainer Fees
- The broker occasionally demands some advance payments in the form of a retainer fee. A retainer fee may be a fixed amount paid ahead of or even before the sale process starts. It can also cost someplace between several thousands to even tens of thousands of dollars. A retainer fee mostly absorbs upfront costs that are associated with preparing the business for a sale, that is making or developing valuation, and marketing material among many other administrative tasks.
- The retainer may or may not be added to the commission after the business has sold. Talk over these with your broker before doing anything else, because some brokers will subtract their last commission by taking off the retainer, while other brokers will add it in as a separate fee.
3. Success Fees
There is, too, a fee that brokers levy known as a success fee. Such a fee is payable only when the sale is successfully consummated, and the computation often varies because of the basis. Such fee is calculated as a percentage of the sale. By and large, success fees are performance-based charges that is to say, the broker has every incentive to go for the best price or deal for the seller.
A success fee is one of the most common practices in industries, which aligns the interest of the broker with that of the business owner. How much brokers charge to sell a business depends on experience, the value of the business, and the complexity of the transaction.
4. Additional Costs
- Apart from the commission, selling a business is likely to accrue other costs. These include administrative fees, legal charges, and due diligence costs among others. It should be possible to get these costs broken down in great detail from the broker as well as knowing what brokers charge to sell a business in aggregate.
- Some brokers will even offer upgraded services like focused marketing or targeted targeting of the buyer pool. These upgrades will add to the fee and should be included in the total pricing structure.
Broker Fee Determination Factors
Broker fees for business sales are not fixed. Several factors will influence **what brokers charge to sell a business**, including the following:
1. Business Size and Value
Big businesses pay more commission because the sale price is high. For instance, a $10 million business pays only 5% commission while a small business pays 10% commission. A sliding scale commission structure can also be used by brokers where the percentage goes down with an increase in the sale price.
2. Business Complexity
Say more complex firms – the firm with more than a branch. With various revenue streams as well as a messy history, such firms require from their brokers more hard work or skill in terms of expertise in sales or financial management. Thereafter the brokerage charge will be bigger or increase the percentage part from the sale that the brokerage fee shall absorb.
3. Industry Sector
Other industries require specialized knowledge, and a broker may command a premium in those lines of business. For example, a healthcare manufacturing, or technology business experience broker might charge a premium because of the specialty knowledge involved in that kind of transaction.
4. Broker Reputation and Experience
Typically, the more experienced brokers or ones with an excellent reputation in the market will command high fees. Typically, the most respected broker who has historically sold businesses at good multiples or even has a list of qualified buyers who can pay prices at such levels usually commands more substantial fees.
5. Geographic Location
Broker fees may also be influenced by the location of the business sold. The cost of brokers selling businesses in more in-demand markets or working out of big cities may be higher because their business may bring in a higher sale price or more quantity of buyers.
What Do Brokers Charge to Sell a Business? What Are the Ranges?
As we’ve discussed, how much brokers charge to sell a business can vary significantly. However, most brokers work within a few standard pricing ranges:
1. Small Businesses (Under $500,000): For small businesses, brokers may charge anywhere from 10% to 15% of the sale price. These businesses tend to require more marketing and outreach to potential buyers, which can justify higher fees.
2. Small to Medium Businesses ($500,000 to $5 million). The commission for businesses in this category is mostly between 8% and 12%. The commission percentage is likely to be lower in larger businesses because the sale price will be higher.
3. Big Businesses ($5 million and above). With big businesses, the commission percentage likely ranges between 5 and 8 percent, although because of the huge value of the business, what it will be charged might even be much higher.
For that, it’s worth mentioning that commission percentages are normally negotiable. Business owners can usually have a discussion with their broker over reducing fees if they’re working on a bigger transaction or bringing in a buyer in the first place.
Is Hiring a Broker Worth the Cost?
With all the costs, the question of how much brokers charge to sell a business becomes a critical factor. Most business owners ask themselves whether it is worth the money to engage a broker. Here are some considerations in determining whether to use a broker:
1. Expertise and Experience
Business brokers bring extremely valuable expertise to the party. They know business valuations, how to structure the deal, and how to negotiate. That expertise often ensures you get the highest amount for your business.
2. Access to Buyers
Many sellers may use brokers who have long lists of prospective buyers that include individuals, private equity firms, and corporate buyers. It takes them less time to find the buyer and get more money considering their connections.
3. Saving Time
Selling a business is never easy. Most of the groundwork, for instance, rests on marketing the business, answering inquiries, and meeting potential buyers on behalf of the buyer, hence posing as an opportunity to continue running his business or finally quit his business.
4. Confidentiality
The other main reason business owners hire brokers is that they maintain confidentiality during the sales process. A broker most likely conducts the sales without publicity so that the business is not sold to the public and until after the sales, no employees are aware of the happening sale.