You're sold on the idea that a business broker can significantly boost the final sale price for your business.
That's smart – you're probably not qualified to navigate the business-for-sale marketplace on your own and you definitely lack the objectivity required to properly represent your company to prospective buyers.
But you're still having a hard time justifying the additional costs associated with a brokered sale. A broker will undoubtedly yield a higher selling price, but you've heard that brokers take large commissions on the sale and you're just not sure the added price benefit will be enough to compensate for the brokerage fee.
Before you make a decision either way, you need to understand how much business brokers charge and how brokerage fees are structured in today's business-for-sale marketplace. In some cases, you may discover that hiring a business broker is a lot cheaper than you thought it would be.
Small Business Brokerage
Most brokered business sales involve small companies worth less than $1 million. Since these sales often require just as much brokerage effort as sales of larger companies, the broker's fee is based on a higher rate of commission. Although broker's fees vary, it's not unusual for brokers to collect a 10% commission on a small business sale.
Large Business Brokerage
Brokers treat large business sales a bit differently, based on a sliding scale developed by Lehman Brothers. Instead of a 10% small business fee, brokers often charge 5% on the first million, 4% on the second million, 3% on the third million, 2% on the fourth million, and 1% on the fifth million. Fee caps can be capped at either the calculated $150,000 commission (on a $5 million sale) or a lower level of $100,000.
Depending on your circumstances, other fees may apply. For example, if you have already located a buyer and are only hiring the broker to help with the valuation process, expect to pay a flat fee rather than a percentage of the sale. Also, it's important to evaluate your broker agreement for hidden fees that fall outside of the typical broker compensation arrangement.
Broker agreements should address the seller's obligations to the broker both during and after the term of the agreement. "Tails" and other circumstances may necessitate the payment of a commission even after you have formally dissolved your relationship with your broker.