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The basic job of a business broker is to find buyers for businesses that are for sale and to put deals together. Many brokers will tell you that finding the buyers is the easy part and putting the deal together is the hard part. Let's face it, most of us have never sold or bought even one business in our lifetimes. An individual with expertise in the process can be a very important asset to bringing the process to a successful conclusion. A good broker can be an invaluable asset in selling a business.
However, using a business broker is not always the best route to take in selling a business, as will be explained below.
This section will outline the role of the broker, the pros and cons of using a broker, and advice on selecting a business broker to sell your business.
Typical Broker Commissions
Brokers commissions can vary widely and often you get what you pay for. As a business owner you must evaluate not only whether the broker is offering you the cheapest commission, but also consider the probability that the broker will close the sale, the ability of the broker to get a good price, the amount of work that will be required from you, and the length of time that it will take from when you list until a sale is made.
For small businesses commissions can be as high as a flat 10 or even 12 percent. For larger businesses the commission goes down. For larger businesses the commission goes down. A "typical" commission structure might be 10% of the first $1,000,000 and 5% of any amount over $1,000,000. If the sale is easy (for example a payroll company, which is usually a cookie cutter sale) the commission might look like this:
- 10% of the first $1,000,000
- Plus 5% of the second $1,000,000
- Plus 4% of the third $1,000,000
- Plus 3% of the fourth $1,000,000
- Plus 2% of the fifth $1,000,000
- Plus 1% of anything over $5,000,000
When working with a sophisticated buyer (or seller) such as a PEG or a large company with a history of consummating transactions a broker will commonly use the Lehman's formula:
- 5% of the first $1,000,000
- Plus 4% of the second $1,000,000
- Plus 3% of the third $1,000,000
- Plus 2% of the fourth $1,000,000
- Plus 1% of anything over $4,000,000
If you have not completed at least a few M&A transaction before and your business is not worth at least $4,000,000 don't expect to get a Lehman's formula agreement.
Occasionally a serious client will buy down the rate with a partial upfront payment. In my experience this is usually a buyer with whom we have a track record of producing results.
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