If you’re planning to sell your business, one important factor to consider is how much business brokers charge for their services. The fees can vary depending on the size of your business, the industry you’re in, and the experience level of the brokerage firm you choose to work with. In this article, we’ll explore the different types of charges that business brokers typically have and how they are calculated. By the end, you will have a better understanding of small business broker fees.
Understanding Small Business Business Broker Fees
When it comes to selling a business, there are two main types of charges that business brokers may have: success fees and retainers. Let’s take a closer look at each of these charges:
Success Fees
A success fee is essentially a commission that business brokers earn based on the sale price of your business. This fee is usually negotiated upfront before you list your business with a broker, and it is paid at the closing of the sale. The percentage of the success fee can vary depending on factors such as the size of your business and the industry you’re in.
Retainers
In addition to success fees, some business brokers may also charge retainers. A retainer is a flat fee that is either paid upfront or on a monthly basis. However, retainers are more commonly charged by M&A firms or boutique investment banks rather than traditional business brokerage firms.
It’s important to note that if your business has a revenue of less than $25 million, you should be cautious of firms that charge large upfront fees for valuations or consultations.
How the Size of Your Business Affects Small Business Broker Fees
The size of your business can have a significant impact on the fees charged by business brokers. While there are no strict definitions, businesses generally fall into one of three revenue categories: Main Street Business, Lower Middle Market (MidStreet), and Middle Market. Let’s explore the typical pricing models for each category:
Main Street Business Brokers
Main Street business brokers typically deal with businesses that have revenues of $1 million or less. For businesses in this category, you can expect to see commission rates around 12% of the sales price. The majority of business brokers in this segment charge a 12% commission rate. If you own the real estate that your business operates from and want to sell it as well, the commission rates for the real estate portion may range around 6%.
At the Main Street level, most business brokers do not charge retainers. However, it’s worth noting that there may be a minimum commission fee if your business is at the lower end of the revenue range, typically ranging from $10,000 to $15,000.
Some well-known Main Street business brokerages include Sunbelt Business Brokers, VR Business Brokers, Murphy Business & Financial, and the largest of all Transworld Business Advisors.
Lower Middle Market Broker/Advisers
Lower Middle Market or MidStreet businesses have revenues ranging from $1 million to $50 million. Businesses at the lower end of this category are often sold by experienced business brokerage firms, while businesses with higher revenues are typically handled by M&A firms or boutique investment banks.
For lower middle market businesses, a common commission structure used by many intermediaries is the “Double Lehman” formula. This formula charges a percentage based on different tiers of the sales price. Here’s an example of the Double Lehman formula:
- 10% of the first $1 million
- 8% of the second $1 million
- 6% of the third $1 million
- 4% of the fourth $1 million
- 2% of everything thereafter (above $4 million)
For businesses expected to sell for $5 million or more, some intermediaries may propose a flat commission rate on the entire sale price. This often results in a similar commission amount as calculated using the Double Lehman formula.
While many lower middle market advisors do not charge retainers, some may have a minimum commission fee of $35,000 to $50,000.
Middle Market Mergers & Acquisitions
Middle Market advisors handle businesses with revenues of over $25 million. At this level, success fees typically drop to a simple percentage, ranging from 1% to 4%. Additionally, some firms may use variations of the Lehman pricing model for middle-market businesses.
Retainers are commonly charged by middle-market firms, with fees ranging from $5,000 up to $50,000 or higher, depending on the size of the deal. These retainers can be billed either upfront or every month.
Summary
When it comes to hiring a business broker, the fees you can expect to pay will depend on the size of your business and the type of brokerage firm you work with. Main Street business brokers typically charge commission rates of around 12% for businesses with revenues of $1 million or less. Lower middle market businesses, with revenues ranging from $1 million to $50 million, may be subject to the Double Lehman formula or a flat commission rate. Middle-market businesses, with revenues over $25 million, often have simple percentage-based success fees.
It’s worth noting that these fee structures are not set in stone and can be negotiated. However, they provide a general idea of what you might expect to pay when hiring a business broker to help you sell your business.
If you’re unsure about the sale price of your business, you can explore our guide on SDE and EBITDA to get started on pricing your business. Additionally, you can reach out for a free business valuation or contact us directly for help and guidance. We’re here to assist you throughout the process.
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