Unlike real estate agents or brokers, business brokers are paid by the seller. This is something every buyer should keep in mind. With that said an experienced business broker can help a buyer narrow down their search options for the businesses that suit their search criteria. As a seller, on the other hand, a business broker can streamline the entire process, from marketing it to prospective buyers to pricing the business.
Now, given that selling a business is one of the most important decisions you’ll ever make, it’s important to know all the important details surrounding business broker fees. This should help you to make your experience with the business broker smooth and help you maximize your profits when selling the business.
Understanding business broker fees
Also known as broker’s commission fees, this amount is clearly outlined in advance when signing the service contract or marketing agreement. This contract is signed by the brokerage firm and business owner. Typically, the contract included a set retainer, minimum fee, duration of the contract, as well as other legal documents and terms of the sale.
How do business brokers get their commission?
A business broker doesn’t facilitate the sale of a business only. There are other activities that a business broker can do to make the entire process easier for the seller, like:
- Planning business valuation
- Preparing the required documents to introduce the business to prospective buyers
- Creating the necessary marketing materials and making sure that your business is listed on different platforms
- Pre-screening prospective buyers to identify the serious buyers, with the required financial standing to purchase and run your business
- Negotiating with all the interested buyers
- Finalizing and closing the sale of the business
If a business broker cannot perform any of the above functions, they will refer you to the right professionals, thus saving you valuable time and resources you might use when trying to figure out everything for yourself.
Apart from the agreed commission, business brokers expect their clients to pay an upfront fee known as a retainer. Generally, retainer fees differ and can range somewhere from $2,000 – $20,000.
According to Orlando Business Broker, a broker’s retainer fee depends on the type of business on sale, the listed prices, as well as the business broker. However, not all brokers charge an upfront fee—but if the broker includes it as part of the deal, make sure that the broker gives you clear reasons behind the fee.
Broker fees for small businesses
Mostly, business brokers are hired to broker sales for small businesses, whose value is not more than $1 million. Because such sales require as much effort as selling larger businesses, the business broker’s fee is usually set on the higher side. And while the brokers’ fee or commission varies, you shouldn’t be surprised if your business broker charges you a 10% commission for selling your small business.
Broker fees for large businesses
Business brokers handle large business sales differently—following a sliding scale created by the Lehman brothers. Rather than charging the 10% commission charged on small businesses, business brokers follow this scale when charging their clients:
- 5% for the first million
- 4% for the second million
- 3% for the third million
- 2% for the fourth million
- 1% for the fifth million
However, it’s important to note that commission caps can be placed at either the determined $150,000 commission for a $5 million sale, or at a base price of $100,000.
Additional broker fees
Now, depending on the nature of your sale, your business broker can charge you additional fees. For instance, if you’ve already found a buyer, and you only need a business broker to help you in valuing your business, you will pay a flat rate fee, instead of a percentage. Besides, if you need your business broker to help you in valuing your business and preparing all the required documents for sale, they might charge you extra money for those services. Overall, always make sure that you check for any hidden fees that are not part of your standard business broker fee arrangement.
Negotiating business broker fees
Before hiring a business broker, it’s important to understand that their fees are not fixed. That means you have room for improvement. One of the best ways to negotiate business broker fees is to get proposals from several brokers (at least three professional brokers). Now, if brokers hear that they are competing against another reputable broker, they might be willing to reduce their commission or even offer certain services for free.
When it comes to larger businesses, business brokers usually give custom proposals for their services. So, you must have a good understanding from your business broker in terms of the quality and type of services you should expect from the brokers—this should be stated in the contract.
The quality and type of services should be set at a level that will allow the broker to market your business in a way that your business will stand out from similar businesses on sale. Besides, your broker should give you a detailed strategy of how they plan to attract prospective buyers to your business. Please note that negotiating a broker contract is as important as choosing the right broker who will offer the services you are looking for. Also, this determines the fees the broker will charge you.