How Do Business Broker and M&A Commissions Work?

A question that I am asked frequently is "How do business broker and M&A commissions work?" If you are planning to sell your business with professional help, you should have a sense of the commission fees you can expect.

Business broker commission fees

There is no law or regulation that sets pricing, but business brokers typically charge a 10% commission (also called a "success fee") on the value of the business and 6% on any associated real estate. The exceptions are gas stations, grocery stores, and hotels, all of which can be less. I have heard of some brokers charging 12% and others readily dropping a few points in order to get a deal, but most hold firm at 10%.

If another broker is involved in finding a buyer, the business broker commission fee is split between the listing-side broker and the sell-side broker. That is, if they agree to work together (cooperate)—which not all business brokers do. Some states are better than others: Florida is among the best, California among the worst.

I know 10% seems like an awful lot. I have started and built businesses myself, and to give up 10% of all the hard work that it took to build your business is painful. I wish it were different, but the reality is that this is what it takes to keep brokers in business and 10% is what the standard in the industry is. Indeed, it is a lot of work, and often the seller will comment on that towards the end of the deal. I just wish that they could see that at the front end when the 10% seems so steep.

M&A commission fees

It is standard practice to provide a discount above a $1 million selling price, and many merger and acquisition (M&A) firms will say they use the Lehman Scale, although in reality they probably use the Double Lehman Scale. The Double Lehman Scale pays a commission of 10% on the first million, 8% on the second million, 6% on the third million on down to 4% for the remainder.

I’ve seen business brokers that don’t normally do larger deals charge 10% total commission for a selling price above a million. They didn’t do that on purpose (I don’t think), they just didn’t know it is standard to use the Double Lehman. Obviously, the seller didn’t know that either.

More articles by AllBusiness.com:

• What’s Negotiable When Buying a Franchise?
• Negotiating Investment Banker Engagement Letters
• How to Build a Company, and Then Sell It
• 8 Tips on How to Prepare Your Business for Sale
• Why Private Equity Groups Use Debt in M&A Transactions

Smaller deals often have a clearly defined value and a success fee is fairly easy to determine. Not so with larger, more complex deals, and it is often up to the seller and the broker to sit down at some point and figure out a fair commission. As an example, a recent deal we closed had a contingent payment based on the future performance of the company—therefore, the full purchase price would not be known for a number of years. This is commonly called an “earnout.” The “expected” purchase price used for commission calculation ended up being above the base price but below the maximum price.

As a general rule, business brokers don’t charge an upfront fee while M&A advisors do. It makes sense, too. A business broker is operating essentially alone much like a real estate agent, while an M&A firm applies a team of writers, analysts, and dealmakers on your project and also must pay for a marketing campaign. At my firm, we pay substantial out-of-pocket costs for each client for first-class mail, telemarketing, and advertising, and we charge an upfront fee to help pay for it.

Understanding the "tail" on an agreement

Engagement agreements vary a lot, from real estate-type canned agreements for business brokers to custom agreements for M&A firms, but you'll find a "tail" on each one. The tail on an agreement means that once the agreement has ended, there is still a clause that says if you sell to anyone that the intermediary introduced to you within 18 to 24 months, you still owe a commission. So don't let this surprise you, it is standard. What isn't standard is what "introduced" means. My firm defines that as anyone that signed a confidentiality agreement during the time our agreement was in effect.

Are commission fees negotiable?

As you know, everything is negotiable, but a quality broker or M&A firm probably isn't going to move on the fee. However, it is common to change various parts of an agreement depending on the situation.

RELATED: 10 Questions to Ask Investment Bankers When Selling Your Business