9 minute read

To Pay or Not to Pay — Business Broker Fees

Like real estate agents, business brokers are paid a commission, or “success fee” as it's called in broker parlance. The typical range is 10-15% of the business sales price up to about $1,000,000, and a reduced percentage on anything over. Flat fees are also common for small businesses valued under $100,000. Like everything in business, these fees are not set in stone, and there’s always room for negotiation.

Read on to learn more about how business brokers work and how they get paid, or visit BizBuySell's business broker directory to find brokers near you.

Introduction

“A business broker? Who is that? What do they do? How do they get paid?” These are the questions I asked myself back in 2006. I was only two years licensed as an attorney, and I was working as a business law attorney for a national law firm. My boss called me into his office and told me that one of his wife’s family members was going to buy a business. He wanted me to represent them in the acquisition of the company, including preparing the closing documents.

I’ll admit, this was the first time I oversaw preparing closing documents for the sale of a business. As a diligent young associate, I did my research and figured out the documentation needed to close. As we approached the closing date, I began to draft the closing documents. One day, I received a call from a gentleman who introduced himself as the business broker representing the seller.

He requested that I add to the Closing Statement his commission for $50,000. I was perplexed. Although I had no idea what he was talking about, I pretended as if I knew. This so-called “business broker” is getting paid $50,000 and my fee was around $2,500? I was in the wrong profession! Something didn’t feel right, and I had to figure it out.

After I get off that call, I ferociously researched the following five questions, which still stands true today:

What is a business broker?

A business broker is a person who facilitates the buying and selling of a business between the purchaser and the owner of the business. A business broker can also be referred to as a business intermediary or business advisor. No formal college education is required to be a business broker.

However, some states in the U.S. require that you have a license to engage in business brokerage activities. A few states that require a license include but are not limited to Alaska, Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois (registration only), Minnesota, Nebraska, Nevada, Oregon, South Dakota, Utah, Washington, Wisconsin, and Wyoming. In Florida, business brokers have a real estate license, but the law permits the licensee to engage in the buying and selling of business assets (not stock).

There are several state and national business broker organizations. The most prominent include the International Business Brokers Association and the Alliance of Merger & Acquisition Advisors. Business brokers are not required to be members. However, membership in these organizations is important as it provides seminars, workshops, and continuing education.

The business broker is generally not allowed to engage in the sale of stock of a business. The selling of stock is strictly regulated by the United States Security & Exchange Commission. A business broker will almost always be engaged in the selling of the business assets.

What does a business broker do?

A business broker can do many things when assisting a buyer or seller of a business. A business broker can represent a buyer, seller, or both in the sale of a business. If they are representing a buyer, they will assist in advising the buyer of the acquisition process from making an offer to closing the sale and going to the showings. The business broker will also assist in providing a business price opinion, reviewing financial statements, and preparing, submitting, and negotiating the offer. Once under contract, the business broker will assist in the due diligence phase, facilitate financing, and review additional documentation provided by the seller. At the time of closing, the business broker will attend alongside the buyer and assist in handling any last-minute issues.

A business broker can also assist the seller of a business. The primary role is to gather all the business information and financial documentation to present an opinion on the valuation of the business. Once the seller communicates to the broker how much they want to list the business for, the business broker will turn around and confidentiality market the business for sale. Brokers market through online platforms like BizBuySell, their internal customer database, or co-brokering (via a Multiple Listing Service “MLS”). The MLS system is essentially a database of businesses for sale with each listing’s corresponding business broker.

A business broker will vet all buyers, attend showings, and assist in contract negotiations. Once under contract, the business broker will assist in handling all buyer inquiries during the due diligence phase. They will assist the landlord, track the buyer’s financing process, and respond to buyer’s requests. At closing, the business broker will attend alongside the seller and assist in managing any issues that arise.

A business broker can also be a neutral or transactional agent for the seller and buyer at the same time. State laws will determine what is permissible or not under this arrangement. In Florida, this is called being a transactional agent and the statute outlines your responsibilities. For example. Florida Statute 475.278(2) Authorized brokerage relationships; presumption of transaction brokerage; required disclosures states in part:

The duties of the real estate licensee in this limited form of representation include the following:

Dealing honestly and fairly;
Accounting for all funds;
Using skill, care, and diligence in the transaction;
Disclosing all known facts that materially affect the value of the residential real property and are not readily observable to the buyer;
Presenting all offers and counteroffers in a timely manner unless a party has previously directed the licensee otherwise in writing;
Limited confidentiality, unless waived in writing by a party. This limited confidentiality will prevent disclosure that the seller will accept a price less than the asking or listed price, that the buyer will pay a price greater than the price submitted in a written offer, of the motivation of any party for selling or buying property, that a seller or buyer will agree to financing terms other than those offered, or of any other information requested by a party to remain confidential; and
Any additional duties that are mutually agreed to with a party.

Are business brokers paid a commission?

We finally get to the answer to this article’s question mimicking the famous quote by Shakespeare: “To be, or not be?” That is the question. The answer is: Yes! A business broker can be paid a commission or what we are now calling a “success fee” for services rendered to a buyer, seller, or both.

Generally, a business broker’s commission is a percentage of the final purchase of the business that was sold. It is the same principle as a realtor. A realtor gets a listing and, at closing, is paid a percentage of the final sales price of the real estate. If the business broker has the listing, the seller will ultimately pay the full commission based on the final price of the business at the time of closing.

If the buyer has a business broker during the transaction, the seller’s business broker may pay a portion of their commission to the buyer’s business broker. This is called co-brokering. In a co-brokering arrangement, the seller should never have to pay an additional commission to the buyer’s business broker. The seller’s business broker commission should always pay the co-brokering fee.

If the seller’s business broker is not willing to co-broke with the buyer’s business broker, then the buyer would have to pay their broker directly. It will typically be a flat fee with half paid at the time of retaining the business broker and the final payment paid at closing. Occasionally, a buyer may pay a percentage of the final sales price to the broker. This fee structure is typically found in larger, multimillion-dollar transactions.

What is the business broker’s commission?

A business broker’s commission is not set by law. It is a private negotiation between the business broker and their client, which is then memorialized in a contract. To put it simply, the business broker’s commission is whatever the business broker and seller or buyer agree to.

What establishes the business broker’s commission depends on a few factors such as the state you are in, the price and size of the business. The most common business broker commission range is ten percent to fifteen percent for businesses sold between $100,000 to $1,000,000.

If the business is sold for less than $100,000, you often see a flat fee payment no matter the price. For example, a $10,000 or $15,000 commission is agreed on for a business valued at $95,000. If the business price is over $1,000,000, the client could negotiate ten percent on the first $1,000,000 and eight percent on anything above that.

In the end, everything is negotiable. However, the business broker commission is usually dictated by what’s customary in the region and what the business brokerage companies establish.

Who pays the business broker?

The business seller generally pays broker fees. In cases where both the buyer and seller have their own broker, the brokers generally split the broker commission.

If the buyer has a business broker that the seller’s business broker does not pay, they are, in essence, hiring the business broker as a consultant or advisor. The buyer would try to negotiate a flat fee with half paid up front and the rest at closing. Flat fees for a buyer can range anywhere from $5,000 to $25,000, depending on numerous factors such as the size of the deal and how involved the broker will be.

Is the business broker’s commission tax deductible?

If you sell your business and pay a business broker commission, your accountant can assist you in getting a tax deduction. Ask your accountant to also assist in allocating the ultimate sales price between the depreciable and amortizable assets. Assets such as fixtures, furniture, equipment, and intangibles such as goodwill. I highly advise that you consult with your accountant well before closing to understand the tax implication of selling your business.

Is it worth hiring a broker?

Since I am also a business broker, it is biased for me to say that every buyer and seller of a business should consider hiring a business broker to assist in the purchase and sale of a business. However, after learning the value of what a business broker can bring to a transaction, I decided to be one!

I have found that hiring an engaged and experienced business broker can help sellers make more money (because they undervalued their business to begin with) or help deals from falling apart (and make no money). As for the buyers, a business broker can help a buyer from overpaying and prevent deals from falling apart. Just like in any purchasing decision, you get what you pay for so choose your business broker wisely and pay them a fair commission for an honest day’s work.