Anyone who is seriously considering a business sale has two primary questions – how long will a sale take, and what are the costs and fees associated with selling a business?
For most business owners, the answers to these questions are highly dependent on how the business is sold. Should you choose to sell your business on your own, the sale process can be quite lengthy.
Working with a business broker can expedite your transaction considerably. While brokers do charge a fee, this is typically offset by the benefits they bring to the sale, both in terms of adequately valuing your business and finding a qualified buyer.
With that in mind, let’s take a closer look at the fees and timeline typically associated with a brokered business sale.
What Are the Fees for Selling a Business?
The fee structure you’ll encounter when selling a business often depends on whether you hire a business broker or a mergers and acquisitions (M&A) advisor to help with the sale. Both of these entities offer the same type of services, but they are primarily distinguished by the market they serve and the fees they assess.
Business brokers are most strongly focused on deals valued at less than $1 million, while M&A advisors handle larger transactions. It should be noted, however, that there is a great deal of overlap here. Some business brokers pursue larger deals, and some M&A advisors specialize in brokering small business sales. There are no hard and fast rules – business broker and M&A advisor are somewhat interchangeable terms.
This also applies to common fee structures. Business brokers and M&A advisors often ask for upfront fees (paid in a lump sum or on a monthly retainer) with a commission-based model where the fee is paid following the sale of a business, and where the up-front payment is often credited against the commission. As with transaction sizes, this is not one-size-fits-all and the fee structure can often be negotiated.
How are M&A Deal Fees Structured?
Typically, back-end commissions are tiered such that as the deal value increases, the commission rate declines. M&A Advisors do this because it generally requires as much work to sell a deal valued at $1,000,000 as it does for another valued at $10,000,000. The level of up-front fees can vary by what is required to bring the business to market. If the advisor has to do a lot preparation other than preparing a confidential memorandum such as cleaning up the financial information, then the fee will reflect this. Every case will be different.
Are there other Fees Associated with a Sale?
In all cases, the seller should engage a good transaction attorney to at the very least the Purchase & Sale Agreement and other associated agreements. For more complex deals, it may be useful to get the attorney involved with negotiating the Letter of Intent (LOI). Attorney fees typically run anywhere between $10,000 and $30,000 and more depending upon the complexity of the transaction. Generally, the legal fees are paid at closing. Sometimes, the seller may also want to pay their accountant to evaluate the proposed deal for tax purposes. Accountants will generally charge an hourly rate.
Are Deal Fees Tax-Deductible?
The short answer is yes.
How Long Does It Take to Sell a Business?
The business sales process is a complex undertaking and probably takes longer than you’d like. Time is needed to prepare the business to bring it to market, secure a buyer, negotiate an LOI, complete due diligence and negotiate the Purchase & Sale contracts. Our experience is that from the time someone engages our services, it takes on average 9 months to sell a business. A highly marketable company may sell in as quickly as 6 months, but we generally tell owners they are into the sale process for a year. Employing a good broker to sell a business in CT will greatly increase the likelihood of shortening this process.
Fee structures and deal sizes may vary, but there is one constant when it’s time to sell a business – a good M&A advisor or business broker can add considerable value to the process by expediting the sale and helping to ensure you receive full value for your company.
This added value makes working with an advisor or broker a smart move – regardless of your fee structure.