Putting a business up for sale is an enormous undertaking. It will take time and money to complete the process accurately, and there is never a guarantee of getting the price you ask for. Business brokers are the solution to this problem, and many business owners who are ready to sell will find the best one to work with.
As with anything, there are pros and cons to working with a broker. Business brokerages provide a level of expertise and knowledge that helps business owners deal with the selling process while maximizing the value of the business.
Of course, not all brokerages are not created equal, and some are even downright expensive. Experienced business owners could decide to go through the process alone in those cases.
Let’s dive further into brokerages, their role in the process, and the potential fees that come with them.
What is a business broker?
Sometimes called a business advisor or intermediary, a business broker is similar to a real estate agent. This individual is there to facilitate the purchase and sale of a business between the purchaser and the owner.
Though there is no formal college education required to become a business broker, some states require they hold a license to practice. Some of the states are Alaska, Arizona, Florida, California, Utah, Washington, and more. In Florida, a business broker must hold a real state license as it allows them to engage in such activities, though not in the sale or purchase of stocks.
For states that require a license, statutes outline the actions and duties of a broker:
Honesty and fairness
Account for all the funds
Diligence in each transaction
Disclosing all known facts about the transaction which may not be available to the buyer
Presenting offers and counteroffers in a timely manner
Limited confidentiality unless waived by the client
Any other duties as agreed to between the broker and the client
These outlined duties were implemented to ensure every client is treated fairly and knows what to expect throughout the transaction. It’s a way to weed out the bad eggs so clients feel comfortable with their decision.
A few business broker organizations exist, such as the International Business Brokers Association and the Alliance of Merger & Acquisition Advisors, though they are not required to hold memberships. Of course, holding a membership to one of those organizations allows the business broker to remain up-to-date on the latest industry information by attending seminars, workshops, and more.
It’s clear that a business broker plays an important role throughout the purchase and sale process, but many business owners wonder how they get paid and how much securing one will cost.
A business broker can get paid in either of two ways, brokerage fee or retainer; however, most will stick to the fee.
What is a brokerage fee?
So, what is a brokerage fee? This fee is the commission a business broker will charge to execute the sale transaction on the seller's behalf. A brokerage fee will cover purchases, sales, consultations, negotiations, and delivery.
In other words, the brokerage fee is similar to the commission charged by real estate agents. Similarly, the brokerage fee will be a percentage of the final purchase price of the sold business.
In situations where a buyer has found a business broker, the seller’s business broker may pay part of their commission to the buyer’s business broker - this is called co-brokering. Suppose the seller’s business broker isn’t willing to go along with co-brokering. In that case, the buyer will pay them directly - typically a flat fee with half paid upon retainer and the rest upon completion.
How do business brokers determine their broker fees?
The answer to this question will vary from one broker to another. However, there are commonalities between the factors that influence the amount the broker will charge. One of the primary factors is the structure of the deal.
Typically, the fee will be lower for simple transactions such as the sale of one business. On the other hand, company mergers will cost quite a bit more due to their complexity.
Another factor is the stage at which the sale currently resides. For businesses at the beginning of the process, where the business broker provides an initial assessment and a marketing strategy, the fee will go up significantly.
Of course, the longer the business broker has been in business successfully, the higher the fee they can charge.
While you are working to find the right business broker, keep these questions in mind:
How many businesses have they sold within the same industry?
How long have they been in business?
How long does it typically take them to close a transaction?
What is the success rate?
How much is a business broker fee?
Now that we’ve covered the business broker fee in more depth, the question of the amount remains.
Typically, a business broker will charge between 10% and 20% of the total sale price as a fee for their services. The total amount of the fee is due at the time of closing and is generally split between the buyer and seller - a process known as co-brokering.
For example, a company that is sold for $150,000 would generate a fee of around $15,000 and $30,000 in broker fees split evenly between the two parties.
Of course, there are always exceptions to the rule. In some cases, the client prefers to pay a negotiated sum rather than a commission off the actual sale. This is something that would have to be discussed between the two parties.
Upfront vs. post-sale fees
While some business brokers charge upfront fees, some decide to charge post-sale fees. As the name suggests, upfront fees are paid when the client gets into an agreement with the broker. The amount is determined based on a percentage of the asking price for the business.
As the name suggests once again, the client pays post-sale fees to the broker once the business is sold. The fee is charged as a percentage of the actual sale price of the business and is due upon closing.
There are pros and cons to choosing either route. With upfront fees, the business broker will secure funds for their services at the very beginning making sure their time is compensated should the sale fall through. When using the post-sale fee option, the client may believe the broker will become more motivated to ensure the sale of the business completes as expected.
Can I negotiate the business broker fee?
A business broker fee is not always set in stone and is open to negotiation. First, it’s important to understand the fee structure used by the broker. Most business brokers will charge a commission-style fee of 10% to 20% of the final sale price of the business.
Though they are not required to, some brokers will reassess their fees depending on the situation. A business broker might be willing to lower their fee if they believe they’ll have trouble finding a buyer or when their client’s situation is unique, requiring a one-of-a-kind approach. For example, some clients are willing to pay a higher fee upfront and a lower commission for the overall sale.
Generally, once you understand the fee structure the chosen business broker uses, the best way to start a negotiation is an open and honest conversation. Understanding both sides allows the client and the broker to be better positioned to make decisions regarding fees.
Is the broker fee tax deductible?
According to the Tax Cuts and Jobs Act of 2017, the business broker fee is considered a transactional fee and is, therefore, not tax deductible.
There are other expenses incurred throughout the sale process that are tax deductible. One example is hiring an attorney to help with the process. The fees they charge are tax deducible. Also, costs that went along with preparing the business for sale, such as renovations or other repairs, become tax deductible.
The sale of a business is an intricate process. Before deciding what can and cannot become tax deductible, it’s important to reach out to a tax professional who is prepared to help with the paperwork.
Is the broker fee worth it?
The right business broker can make all the difference in such a transaction. A professional who has experience with such transactions for some time will come with a wealth of information - well worth the broker fee.
Reach out to professionals such as those at Smobi who are there to help with the process. Smobi, the perfect marketplace to sell and buy brick-and-mortar businesses, is the best place to start the entire process for either party. Smobi will work to put together in-depth documentation regarding each listing and work to facilitate between buyer or broker and seller.
Whether you decide to work with a business broker, taking on at least half the broker fee, makes no difference with the assistance you’d get from Smobi. Start the process now toward selling or owning a business.