Diving Into the Finer Points of Fees, Commissions & Retainers
When I first speak with online entrepreneurs who are considering selling their business, they usually have two questions that are top of mind. First, how much do you think my business is worth?
The second is the one we’ll dive into here – how much is your fee?
Business brokers are a little different from M&A advisers and a lot different from real estate agents, accountants or attorneys. Even among business brokers, we don’t all charge the same or structure our engagements similarly. So don’t be afraid to ask. We get this question constantly.
Most business intermediaries don’t like to share their fee structure until the prospective seller has committed to a face-to-face meeting. Since we online brokers often don’t meet our sellers in person, we’re a bit more willing to share our fee structures right off the bat.
What’s Your Fee, Pal?
There are three potential fees an adviser may seek:
1) An engagement or work fee, usually paid at the time the seller signs an exclusive listing agreement.
2) A monthly retainer, generally paid during each month of the listing period.
3) A commission, or success fee, paid once the transaction closes and the seller has received his proceeds from the buyer.
The fee structure depends greatly on the size and complexity of the engagement. Large transactions, say $50 Million and up, will usually employ the services of an investment bank with a large staff of professionals. They are guaranteed to charge all three fees.
Down from those are businesses generally selling between $5 Million to $50 Million, which often employ M&A firms. These are privately-held businesses which may have a board of directors and usually have a layer of management between the owner and the worker bees. All M&A firms will charge an upfront fee but may not ask for a retainer. Or they may ask that the upfront fee be paid over monthly periods.
We lovable business brokers are at the bottom of the intermediary food chain. We don’t generally work on transactions above $10 Million. Oddly, we are the class of characters where you’ll see the greatest variations in fee style.
How Much is This Going to Cost?
There are no official stats kept. But there is no question that a majority of business brokers charge only a commission at closing. Nothing else. I put business brokers into three different categories, which will usually dictate their fee structures.
1) Your local “Main Street” business broker who’s selling hair salons, liquor stores and pizza parlors makes a living by collecting as many listings as possible. They’re going to make it easy and simple for sellers to sign up. No upfront fees, no retainers.
2) More selective business brokers, sometimes called “Upper Main Street” or “Lower Middle Market”, are more likely to ask for an upfront fee, which can range from $500 to $2,500, possibly up to $5,000 if the deal is large enough.
3) Specialty business brokers (such as online experts like eBiz Advisers or others who sell only medical practices, daycare centers or laundromats) often charge an upfront fee and a success fee, both probably higher than the other brokerage firms.
Commission percentages will vary, depending on the size of the deal and the nature of the brokerage. The most common success fee is 10% of the total consideration paid to the Seller, which can include inventory amounts, accounts receivable or cash. You may find real estate agents, accountants or others who will quote a 6% or 8% fee. You’re not likely to get much for your money, or a positive outcome, in those situations.
On the upper end, specialty brokerages commonly go up to 15%. Most online and tech specialty firms will state a percentage for the first $1 Million of consideration, then scale down for each $1 Million thereafter.
Here at eBiz Advisers, our Success Fee is either 10% or 12.5%, depending on the complexity and size of the engagement.
We differ from our competitors when it comes to our initial fee. We offer a money-back guarantee on our $1,500 initial fee. The only assignments we accept are businesses which we believe have a high certainty of success. Because of that, we agree to refund half the initial fee if we don’t bring the seller at least one offer within 90 days of signing up with us. If we do succeed in selling your business, the entire initial fee gets applied to your success fee at closing.
Why These Fees Are Worth It
There’s admittedly a huge temptation to sell the business on your own. How hard can it be, right?
Ask yourself some questions. Do you have the skill to accurately value your business, not grossly overpricing or underpricing it? Do you know what prices have been achieved for comparable businesses to yours? Do you have the time, energy and skillset to produce the professional investment package that buyers will expect? Do you want to speak with 50, 100, maybe 200 potential investors who will ask for information about your business? Can you tell the difference between a real business buyer and a tire kicker?
Now, go a couple steps deeper. Do you have the personal names, phone numbers and email addresses of thousands of already qualified, cashed-up buyers looking for online and tech businesses to purchase? Have you worked closely with SBA lenders who can make the deal happen? Do you know how to avoid lawsuits and make sure that proper disclosures are executed?
You get the point. There are dozens of ways in which a qualified intermediary earns the fee. I am a Certified Business Broker with more than a dozen years of transactional experience. I also choose to specialize in Internet and tech businesses, which brings tremendous knowledge and context to the transaction.
We believe our expertise and commitment more than pays for itself through a much higher purchase price than what you could achieve on your own. Plus, the chance of success is infinitely greater with a professional by your side.