Transaction Costs: The Commission
What’s the Fee?There is no standard fee. What a broker charges for his or her services can depend on the size of the transaction, the complexity of the deal, the location of the practice, the amount of competition it faces among other factors and – most significantly – the depth of experience and reputation of the broker. But as a general rule, in the Main Street Market, we and many other brokers generally earn fees of between 8% and 12%. For bigger deals, we use a “laddering” fee structure. That is, at certain dollar levels of the transaction, we’ll reduce the percentage. For us, those dollar levels are usually in increments of $1 million.
Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to market and sell businesses.
Become a Professional Business Broker…That said, I’ve heard of commission fees as high as 15%. Hopefully, it’s not a surprise to learn that, as counter-intuitive as it may seem, the smallest businesses generally incur the steepest fee percentage. Why is that? Well, the reason our brokers give is that it takes as much – if not more – work to sell a $100,000 business as it does to sell a $1 million business. So, think about the impact of a 10% fee on a sale of a $100,000 business versus the sale of a $1 million business. In the smaller deal, the broker earns $10,000. In the larger deal, it’s $100,000. Even with a 12% fee, the smaller deal generates a fee of only $12,000. If the transaction takes the customary “average” time of seven to 12 months to close, which deal would you prefer to work on?
The SolutionThis problem has a two-part solution. First, assuming that all discussion during the process of the broker-client relationship that addressed the net proceeds at sale included a reminder to the seller that transaction costs must be considered, as soon as any offer is submitted, before presenting it to the seller, prepare a draft closing statement – to the extent that you the necessary information – and present it to the seller when you present the offer to show the seller what the approximate net proceeds will be once all the known transaction costs are deducted. Do this with every offer and, as an offer is negotiated, with every new version of every offer. This way, there is no “surprise” to the seller; he or she will have repeatedly seen all the fees – most importantly, the largest one; the broker’s – during the negotiation process. The second part of the solution is to prepare a commission statement at the point that the negotiations are completed and a deal is being signed. Have the seller sign it acknowledging what the broker’s fee is and that it is due at closing. As a rule, you’ll be hard-pressed to find the seller in a better mood than when he or she is putting his signature or initials on what is the final iteration of the agreement. This is the time to get the seller to acknowledge that the broker has earned the commission.
Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker.