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When selling a business, there are numerous costs associated with the sale—both expected and unexpected. One of these costs is business brokerage commission or fee, which you should expect before engaging a business broker.
This post will discuss how business brokerage commissions work and the factors that affect the commission you pay your broker.
What is a business brokerage commission?
This is the fee you pay your business broker for facilitating your sale. Please note that the law doesn’t set a business brokerage commission. Rather, it’s a private negotiation between the client and the broker, usually indicated in the contract. To put it in simpler terms, a business brokerage commission is a fee that the business broker and client agree to.
Several factors determine business brokerage commission, and we shall discuss them later in this post. However, the average business brokerage fee ranges between 10% and 15% for businesses valued between $100,000 and $1,000,000.
If your business is valued at less than $100,000, you are more likely to pay a flat fee. On the other hand, for businesses valued at $1,000,000 and above, the client can negotiate a 10% commission for the first $1,000,000 and then 8% for the amount above that.
If you, as the buyer, have a business broker, who the seller’s broker does not pay, you can consider your Business Broker from Orlando as an advisor or consultant. In this case, you can try to negotiate with your broker to pay half the commission upfront and the balance after closing the deal. Generally, flat fees range between $5,000 and $25,000. However, this also depends on numerous factors.
All in all, business brokerage commissions are negotiable. Let’s look at a few factors that can affect the business brokerage commission that you pay.
Value and size of business
The first factor is the value of your business. It would help if you had an idea of how much your business is worth before negotiating with a broker.
You can determine the value of your business by looking at its historical financial performance, projected future earnings, and current market conditions. Once you have an accurate valuation, it’ll be easier to discuss the commission with your broker.
The second factor is the size of your business. A small business will typically have a lower commission than a big business. This logic is that small companies tend to sell faster than big businesses. Therefore, the broker doesn’t have to spend as much time and effort on the sale.
Business location
The location of your business is another important factor that affects the commission. Businesses located in major cities tend to have a higher commission than those in rural areas.
This is because businesses in major cities are more valuable and attract more buyers. The broker has to put more effort into finding a buyer for a company located in a rural area, which means they should be compensated fairly.
Type of business
The type of business you’re selling also affects the commission. For example, businesses with tangible assets, such as real estate or equipment, typically have a lower commission than businesses without any tangible assets. The broker doesn’t have to spend as much time marketing or advertising the business.
Terms of the sale
The terms of the sale also play a role in the business brokerage commission. For example, if you’re selling your business on an installment basis, the broker will likely charge a higher commission.
The broker has to put in more effort and time to close the deal. They also have to make sure that the buyer can afford to make the monthly payments. In contrast, the broker will charge a lower commission if you’re selling your business outright.
The role of the broker
The role of the broker also affects the business brokerage commission. If the broker is doing all the work, they should be compensated fairly. This includes finding a buyer, negotiating the sale, and closing the deal. On the other hand, if you’re doing most of the work and the broker is only acting as an advisor, you can try to negotiate a lower commission.
The economy
The state of the economy also impacts the business brokerage commission. Businesses are typically valued higher in a booming economy, which means the broker can charge a higher commission. In contrast, companies are generally valued lower in a recessionary economy, which means the broker might charge a lower commission.
Competition
Another factor that affects business brokerage commission is competition. If many brokers compete for your business, they’re likely to charge a lower commission. They know that they won’t make much money if they don’t get the company.
Conversely, if few brokers are competing for your business, they can charge a higher commission. In the end, it’s up to you and the broker to negotiate a fair commission. By understanding the factors that affect commission, you’ll be better positioned to negotiate a deal that works for both parties.
Experience of the broker
The experience of the broker is another important factor to consider. An experienced broker will likely charge a higher commission than a less experienced broker.
This is because an experienced broker understands the market better and can get you a better price for your business. They’re also more likely to have a network of buyers, which means they can sell your business faster.
Bottom Line
So, how do business brokerage commissions work? It ultimately comes down to a negotiation between you and the broker. The commission is based on several factors, including the value and size of your business, the business location, and the type of business.
The broker also considers the amount of work they put into selling the business. In a competitive market, they may be willing to charge a lower commission, while they may be more likely to charge a higher commission in a less competitive market. Ultimately, it’s up to you and the broker to negotiate a fair commission that works for both parties.