What Is The Typical Business Broker Fee? Who Pays It?

Was just asked the question from a business owner what the "typical commission" amount is for a broker and if upfront fees are common?

My response to him about brokers commission was along the lines of:

In nearly all cases, it is the seller who pays for the services of a business broker. The commission, usually paid at escrow to the brokerage that listed the business for sale, representing a seller in marketing the offering and negotiating on behalf of the seller for favorable price and terms.

That payment is due as specified in the listing contract the seller and broker signed, authorizing the broker to market the business for sale and promising to pay the broker an agreed on amount for successfully generating a satisfactory deal for the seller.

The amount of the commission is completely dependent on what the seller and broker agree. Most business brokers charge at least eight to twelve percent of the selling price and there usually is a minimum fee, often it is between eight and fifteen thousand dollars, depending on the brokerage, for achieving a transaction, even if there is such a low selling price that the minimum exceeds the agreed-on percentage of the selling price. If the listing broker obtained the buyer, the brokerage receives the entire commission which may be divided among agents of the brokerage who were involved in the transaction.

If the buyer was introduced to the business by a different brokerage - not the listing broker, the commission will be divided by the listing and the selling brokers, usually on a 50/50 basis. On occasion, a buyer will engage a broker to help in the search for and purchase of a business. Under those circumstances the buyer will pay an agreed-on amount - usually a flat fee depending on the size and difficulty of the transaction - to the broker for services involved in finding and helping to negotiate the purchase of a business.

As others have stated, the commission is always negotiable, it would be unethical for brokers to all agree on a fixed number. I live in Orange County, CA, so there is plenty of agents and brokers to choose from in regards to a prospective seller. If a broker were to sell a business that had a liquor license and they had to do an ABC transfer, then they might be more inclined not to discount their commission, because of the work involved.

Penny wise and dollar foolish. I recently came across a co-broker deal that raises questions about the commissions that sellers may or may not pay. The business being sold is a chain of several retail locations that will sell for several million dollars. The commission is on a sliding scale--5% on the first million, 4% on the second, 3% on third, 2% on everything over $3 million. I'm sure that the sellers thought they were really getting a "bargain"; but, here's why they are wrong: (1) The commission is so low that a "co-broker" who has an interested buyer may very well not ever promote the business because the resulting 50% commission split is too low to make it worth their efforts, and there are plenty of other similar businesses that will pay a more reasonable higher commission. The competition in the market place is not just on price; but also on making the commission attractive enough for multitudes of brokers to promote it. (2) The bargain commission came at a price -- the listing broker charged the listing seller a $20,000 up-front, non-refundable "packaging fee" on top of any commission that will be charged. And, if it does sell, that effectively makes the commission on the first million dollars 7%, not 5%. Sellers need to realize that "bargain" commission rates may save them a few dollars at the closing; but, may result in them selling the business for far less than if they had had many brokers eager to show their business because they were offering a competitive commission. For example, if I were a seller, I'd rather pay 6% of $4,000,000 than 3% of $3,000,000.... it's simple math.

It should be clear that in almost every situation (there's always room for they very rare exception), the commission on a business sale is paid by the seller out of the proceeds--not by the buyer. If the buyer is represented by a broker, almost always the commission will be split by the listing broker with the buyer's broker. Typically, brokers charge 10% to 12%, with a minimum of $12,000 to $15,000, depending on the market and the type of business. The minimum is rather firm, because the smaller deal can actually end up eing more work than one twice the size.

Brokers often charge a minimum commission, anywhere from $12,000 to $15,000 is what I've seen in Orange County. I can understand that a seller might feel like that's a lot but it is usually my experience that you get what you pay for. Furthermore, almost every broker I know will attest to the fact that smaller deals, where the minimum will apply, are usually more work. After hundreds of deals it has proven to be true over 90% of the time. The smaller deals, under $100k, have more phone calls, more meetings, more issues and more time spent. Although I agree with Nanda that there is no standard and its all negotiable, I would say that if there were then 10% would be it.

Who Pays It? doesn't appear to have been answered so I will offer an observation. The commission is equally shared or paid by the seller and the buyer. Generally the seller is required to pay any commissions from the proceeds of the sale. However, the seller knows this in advance and so will only accept the buyers offer when he feels it is reasonable and will cover all his out of pocket fees including the brokers commission. I've had buyers offer to pay me an additional commission if I get the seller to accept the buyers offer. That would be unethical for a Certified Business Broker to accept.

BRE guidelines specifically state that no broker should tell a client that this is the "normal" or "standard" commission. All commission is and should be negotiable. Further any discussion of "standard" commission in an open forum like this could be a violation of anti-trust rules.

So, my recommendation is that you call a few brokers ask them what they will charge in your circumstance and make a decision. Each broker is free to charge whatever they feel is appropriate for the service they provide, as long as they can get an agreement with the client. But most brokers have their own specific percentage and minimum commission that they would charge. As previously stated by others, someone who charges a higher commission could be well worth it if they can get you a higher selling price (due to their better marketing, having a database of buyers interested in that type of business, having specific industry knowledge and experience, etc.).

In general, when a business owner lists a business for sale, they have an agreement with the listing broker regarding the commission that seller will pay upon closing. Then Buyer would not pay any commission. But if you as a Buyer engage a broker to find a business for you, then you may have an agreement with the broker to pay a commission upon successfully finding and closing on a business purchase.

As as already been stated, commissions are negotiable; but in Southern California they are usually 10% with a $10,000 minimum. In Northern California 12% is very usual and the minimum can be $15,000. Better brokers in Northern California demand bigger fees because they have more experience. In Southern California the best and the worst all charge the same, but what you get for your money is not the same. I was a business broker for many decades, but now I spend 80% of my time helping buyers be properly represented in a transaction. Since there is an old business rule that the broker works for the person who pays them, I am not paid by the seller, but by the buyer. In the few cases when I do take a listing, I am then paid by the seller and I demand that the buyer get knowledgeable assistance with due diligence because it is a conflict of interest to be paid by the seller and represent the buyer solely. As a CPA I must avoid or disclose any conflicts of interest.

As I commented earlier, the standard practice for commissions is 10% with reductions as the sales price of the business increases. There are no fast rules as to how it is paid but the seller is usually the one who pays. I have worked with buyers and my agreement with them was that they would pay the commission. I have also in a very few instances agreed to receive payment over time. The risk was that I would never receive payment and in two occasions that happened. On one sale I agreed to take a down payment and then get paid 9% of the royalties they received from their products. I have already received more than I would have gotten in commissions and still have 10 years to go. I did this because I knew the seller very very well and I had given him an idea he used in a patent he was working on. He had a great product line.