fees for selling a business

fees for selling a business

Holly is the founder of Enterprise Transitions, LP where she helps business owners who want to grow their business, plan for its ownership transfer to family members, key employees or to an outside party, or who needs help when it’s time to sell.

Holly founded as well as StartupPromise.com and so far has answered more than 3, 000 questions asked by business owners about starting, growing and selling a business.

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When it comes to the sale of a business, there are a number of costs — both expected and unplanned — all business owners should understand before they agree to sell their business.

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A few of our Featured Advisors have weighed in, offering their expertise and perspective to explain the costs — from business broker fees and legal costs to hidden fees — as they relate to selling a business.

Before we dive in, it’s worth taking some time to clarify some of the titles and terminology that are important for business owners to understand in the context of selling a business.

In this post, we’re using the title Business Broker meaning the person who serves as an intermediary between the business owner (seller) and potential buyers.

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While the title Business Broker is appropriate for those who represent sellers in the Main Street Market with revenue under $1M, typically intermediaries working in the Lower Middle and Middle Market assume the title of M&A Advisor and Investment Banker, respectively.

Every Business Broker, M&A Advisor and Investment Bank has its own method of charging clients for their services.  However, because their fee is typically tied to the business’ Enterprise Value, their respective fees are relatively similar for a given transaction.  This doesn’t mean you shouldn’t compare fees.  By all means do so and be certain you understand the terms in their listing or engagement agreements.  Those vary widely and can be very tricky to navigate.

Generally speaking, the majority of the fee paid to a business broker will be paid when the sale actually closes.  For this reason, the fee may be referred to in your listing or engagement agreements as a Success Fee.  It’s not unusual for a minimum success fee to be defined in the listing agreement or engagement agreement, especially for smaller deals.

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That said, prior to the sale closing, the business owner is likely going to incur certain expenses with their business broker along the way.  Almost all sellers will be expected to pay an upfront valuation and/or marketing fee.  And it’s not unusual for business owners to be required to pay a monthly retainer fee for their M&A Advisor or Investment Banker.  Frankly, this is one way business brokers determine if a business owner is truly prepared and willing to sell their business.  Without some skin in the game, many business owners would waist business brokers’ most precious resource — their time.

We’ve got another post covering the Lehman Formula used to calculate the business sale success fee paid to the business broker here.

Exit Promise Feature Advisors Greg Younts, Mark Fazio, and Kwame Dougan have provided answers to some of the most frequently asked questions regarding fees and expenses associated with selling a business.

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Greg Younts comments that his firm represents sellers that range in size from $500K to over $100 MM in annual revenue. Typically, for the larger businesses, more work is required from the broker in terms of valuing the business, assisting the business owner in getting prepared to sell their business, developing and implementing a marketing strategy and the materials that will be used to market the business, and in negotiating with buyers and closing the sale.

For a small business, our broker commission is typically 10% of the sale price of the business. The upfront fees required to value, market and sell the business range form $1, 000 – $2, 500.

What

For a larger middle market company. The upfront fees for the required services can range from $2, 500 – $25, 000+. The broker’s commission can range from 3% to 10% of the total sale price. The time investment for a broker in the larger transactions can be several weeks to 2+ months.

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Regardless of the size of the transaction, the fees we charge upfront are typically fully credited to the broker’s commission that is due at closing.

In some cases, our clients prefer a consulting arrangement in which we charge per hour for our services. This is a good option for the business owner that may not need our full range of services, and would need our help on a limited basis and possibly for a limited time.

Greg points out that the type and quality of services provided vary greatly from one broker to another. And, the size and types of businesses represented by a broker vary. It is critical that the business owner selects a broker with the experience and expertise to represent their size and type of business.

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The business must be marketed by a broker in a manner such that the business will stand out as a good acquisition candidate with buyers who are looking at other similar businesses for sale. The business owner must be prepared to pay a reasonable fee to engage with the right broker that will provide the necessary services to ensure the best possible result in the sale of the business.

Greg explains that fees are negotiable in some cases. The best way to negotiate is to get proposals from at least three reputable brokers that can meet your needs. If a broker knows they are competing against other strong brokers for the contract to represent the business, they may be willing to reduce their fees for certain services.

Business

For larger businesses, top business brokers will typically provide a custom proposal for their services. The business owner needs to have a clear understanding from a broker in terms of the type and quality of services they will receive in the contract. The type and quality of services must be at a level such that the business will be marketed by a broker in a manner that will make the business stand out against other similar businesses on the market. And, the broker should use a strategy to identify and attract the best possible buyers for the business. Negotiating the broker contract is as much about finding the right broker providing the right services as it is about fees.

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Greg describes that the broker’s fees are typically based on the size of the business, and services and time investment that will be required to sell the business.

Services typically include a business valuation, assisting the business owner in getting prepared to sell the business, developing and implementing a marketing strategy and the materials that will be used to market the business, meeting and negotiating with buyers, and working with a buyer through due diligence, the contract process and close of the sale.

The services and time investment required to sell a business varies greatly depending on the business and challenges that might be unique to selling a particular business. The broker should explain in detail what they anticipate will be involved in the sale process and the time investment that will be required by the broker and business owner.

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G. Bi-weekly progress reports and strategy meetings to discuss the status of the marketing campaign. If buyer interest is not strong, do we change the marketing strategy?

H. Pre-qualify all buyers to confirm they are financially qualified and have the background, skills and experience required to successfully manage the business.

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Greg goes on to say that typical costs involved in any business sale include fees for services provided by the broker, attorney and CPA. The attorney and CPA fees could be significant if there are significant legal matters that need to be resolved or significant clean-up of financial books and records required.

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Their possible costs could be for a business appraisal or machinery & equipment appraisal, if appropriate for a business. A broker can tell you if these services would be beneficial in the sale of your business.

If real estate is included there could be a need for an EPA environment assessment of the property, survey or real estate appraisal.

The time investment is typically significant for the business owner, especially in the due diligence and contract process. A major responsibility of the broker is to relieve the business owner of much of this workload, but the owner will still invest significant time in the process.

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Mark Fazio points out that the legal costs of selling a business can vary based on factors such as the structure and complexity of the transaction, the risks associated with the business, etc.  Many law firms simply bill seller-clients by the hour, but many firms are trending towards offering “alternative fee arrangements” including fixed fees, volume discounts, retainers, collars, phased billing, blended hourly rates and success fees.

Greg goes on to say that legal costs vary greatly depending on the size of the transaction. For a small business valued at $1 MM or less, total legal fees are typically between $5, 000 – $12, 500.

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A broker can recommend attorneys that are experts in business sales and know

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