At some points in your professional life, you may have to buy or sell a small or mid-sized business to a profitable party. In such a scenario, people usually look for business brokers since they help find better buyers and sellers.
These professionals make the dealing process easier by acting as an intermediary figure between sellers and buyers.
But there’s one confusing thing about it. How much do business brokers charge? The good thing, however, is that most brokers follow certain rules and regulations when it comes to charging people. In this article, I am going to provide a complete breakdown of these costs.
Let’s start.
What is a Business Broker?
A business broker is a person or a company that helps people buy or sell businesses and act as a professional intermediary personality to make sure the deal goes through smoothly.
The main goal of these business professionals is to help people find parties that are willing to buy or sell a business at the agreed-upon price.
In return, these brokers charge fees in different ways. It is usually a percentage of the total sale price of the business.
How Much do Business Brokers Charge?
Business brokers usually pick a sophisticated approach when it comes to charging people. They mainly make money via commissions on successful business deals.
The percentage of this commission is around 10% to 15%. The average cost stays around 10%.
These commission rates are applied to deals related to mid-sized businesses. Small business brokers can charge around 20% for working with smaller companies.
Breaking Down The Costs
When it comes to charging people, there’s no specific law or regulation that a business broker follows. Every firm and individual brokers use their preferred model for charging clients.
However, one of the most commonly used models in this field is the Modern Lehman Formula. According to this formula, commission fees are calculated using a tiered percentage structure. The first percentage is usually large and keeps getting lower and lower until the full payment has been made.
It’s a pretty decent formula that makes sure that both brokers and companies deal with the fees in a fair and smooth way.
Example
Let’s say you are selling/buying a business that’s worth $5 million. According to the Lehman Formula, the broker will charge you according to the following criteria:
| Commission Rate | Commission Amount | Cumulative Commission |
|---|---|---|
| 10 % for the first 1 million | $100,000 | $100,000 |
| 8% of the second million | $80,000 | $180,000 |
| 6% of the third million | $60,000 | $240,000 |
| 4% of the fourth million | $40,000 | $280,000 |
| 2% of the fifth million | $20,000 | $300,000 |
💡Important note:
The Lehman Formula is usually applied only for businesses worth $5 million or more. Any amount above $5 million is charged at a 2% commission rate.
Types of Business Brokers Fees
Business brokers use different types of models in order to charge people. I’ve discussed the details of some of the most common ones below.
1. Commission:
It is the most common type of fee model that brokers use. In this model, they charge the client according to the overall sales amount. Most brokers pick this type since it allows them to make a decent amount of money by selling a business at the highest price possible.
This model is also good for clients as well. That is because they’ll only get to pay a commission according to the overall price they’re getting for the business.
2. Initial Fees, Retainers, & Consultation Charges:
Some broker companies can charge an initial fee from clients as well. The total amount of this fee is different for different companies. Besides that, some brokers prefer retainers. They take a one-time decided payment and get the job done in the best way possible.
Besides these, some of the broker companies can charge consultation fees as well. Even if you decide to make the sale/purchase or not, the consultation fee will be deducted regardless.
However, some agencies become generous and deduct this consultation fee from the overall commission once the deal has been completed.
3. Flat Fee:
The flat fee model is usually utilized by brokers who work with small businesses. They charge a flat fee, usually pre-transaction, for the services they will be providing. The exact fees depend on the type of broker as well as the business.
4. Success Fee:
Another type of fee model that brokers use is the “success fee”. It is somewhat of a bonus or reward that they take besides their basic commission rates. Companies pay a success fee to these professionals if they’re able to make the sale within a set time frame.
Factors Influencing Broker Fees & Charges
Broker fees and charges aren’t definite. They keep on changing, and different factors can influence them. Here are some of these main factors:
- Deal complexities: Usually, normal deals have standard rates and charges. However, if the deal is complicated, the broker may charge more money.
- Geographical location: A location with higher business competition, such as an urban area, will have higher commission rates.
- Expertise: If you’re dealing with a relatively new and beginner broker, the charges will be low. Similarly, working with an experienced company or individual will cost more.
- Business size: Businesses that are big in size will have to pay more money to brokers in order to make the sale.
- Fee structure: A broker’s fee structure can also affect the overall charge rates.
Working Without a Business Broker
Many people wonder whether or not they should work without a business broker in order to buy or sell businesses. If you’re dealing with big businesses that are worth more than $5 or $10 million, working with trained business professionals will be worth it.
However, dealing with small companies is possible if you know how to do it well. The following points can be helpful in this regard:
1. Reach Out To People Directly:
If a company is on your radar, reach out to its authorities directly. Companies are always willing to listen to offers for both selling and purchasing businesses.
They also prefer avoiding brokers in order to save commission fees. So, reaching out to them might create the possibility of conducting business without an intermediary personality.
2. Explore Online Marketplaces:
There are several online marketplaces available out there, such as BizBuySell, that are designed to buy and sell businesses.
Explore these marketplaces and target companies that aren’t working with any broker. Make deals with these businesses directly and get things done without brokers.
3. Business Auctions:
Another way to buy or sell a company is by using small business auctions. They are a great way for people who want to take offers from different bidders and sell the company to the highest bidder without requiring a broker.
The Conclusion
Business brokers charge somewhere between 10% to 15% commission of the overall sales price. They use the Lehman Model in order to charge in a smooth and fair way that’s also good for the client.
There are different fee models and structures that these professionals use, and each one of them has its own characteristics. It’s possible to work without a broker in this modern market. Still, I’d recommend dealing with these people in case you’re trying to buy/sell a big company.
People Also Ask
1. How Much Should a Broker’s Fee be?
A business broker’s fee should be around 10% to 15% of the overall commission rate.
2. What does a Business Broker Do?
The main job of a business broker is to help people purchase and sell businesses at their required prices in the market.
3. How do Brokers Get Paid?
Business brokers prefer to get paid according to the Lehman Formula. Some professionals may prefer retainers or an initial upfront fee for working as well.
4. Is it Worth Using a Business Broker?
Yes, these professionals have the right insights and skills to help you sell/buy a business at a very great price.
5. What do Business Brokers Sell?
These professionals sell businesses. Instead of selling assets or products, they focus on helping people sell entire companies to interested parties.
