We’ve recently written about which types of advisors you’ll need to sell your business and how to put together your advisory dream team. Another important consideration as you begin working with advisors is determining how their fees are structured and how much they will add to the cost associated with the sale of your business – a key element that is often overlooked by owners.
The advisors you’ll need and their associated fees will vary depending on whether you sell to an external or internal buyer. Let’s walk through scenarios for each.
Advisory Fees for an External Sale
If you sell to a third party, your advisory expenses are likely to include:
Business Broker retainers – These can range from a one-time charge of a few thousand dollars for a small pizza shop to $10,000 or more per month for businesses with more than $10 million in value. The retainers cover the cost of preparing the written materials on your business, conducting the buyer search, and the broker’s time spent throughout the sale process.
Business Broker success fees – Many brokers use the Double Lehman scale (a common, industry-accepted formula) to calculate their success fees based on the gross sale proceeds:
- 10% of the first $1 million
- 8% of the second $1 million
- 6% of the third $1 million
- 4% of the fourth $1 million
- 2% of everything over $4 million
If your business is worth more than $5 million, your broker or business intermediary may charge a flat percentage (3% to 5%) of the proceeds or an increasing percentage once a minimum selling price has been exceeded. The higher the value of your business, the higher the fee in dollars (but the lower the percentage) will be.
Many brokers will have a minimum success fee as well. Remember, regardless of how your broker calculates their fee, a good one will pay for themselves by getting you a higher value and better terms for your business. Even so, don’t shy away from negotiating with at least two brokers to be sure you’re paying a competitive rate.
Attorney fees – It’s important to work with an attorney who has a lot of experience in business sales. Rates will vary based on the geographic location and the attorney’s level of expertise but will typically range from $300 to more than $1,000 per hour. The higher the value of your business and the more you have at stake, the more important it is for you to choose an attorney with a lot of experience (and a commensurately high billing rate).
Don’t be penny-wise and pound-foolish here! If you hire an inexperienced and/or inexpensive attorney, you are likely to regret it. Highly experienced attorneys will more than pay for themselves by securing the most favorable legal and payment terms for you. This will protect you during and after the sale. Total fees can range from less than $10,000 for a small business sale (less than $2 million in value) to over $100,000 for a sale of $15 million or more.
CPA fees – Your CPA should be involved in the tax planning aspect of your sale and spend at least 10 to 20 hours on your transaction. CPA rates can vary from $200 to $600 per hour, and the more your business is worth, the more sophisticated and expensive your CPA should be. Remember, they can help you minimize taxes on the sale.
Advisory Fees for an Internal Sale
For an internal/inside sale the fees will be considerably lower than for the third party/external sale. You do not need to hire a business broker, but you will need a corporate attorney. If you decide to sell your business to your employees or family members, your advisory expenses are likely to include:
Attorney fees – It will be important for you to work with an attorney with deep experience in family and employee business sales. Again, rates will vary based on the geographic location and the attorney’s level of expertise, but they typically range from $300 to more than $1,000 per hour. As with an outside sale, the more your business is worth and the more you have at stake, the more important it will be for you to choose an attorney with a lot of experience (and a high billing rate).
Typical fees for these transactions range from less than $10,000 for a small business sale (less than $2 million in value) to $30,000 or more if your business is worth over $10 million or you want to implement advance estate planning or gifting strategies.
CPA fees – Again, your CPA should be involved in the tax planning aspect of your deal and will probably spend at least 10 to 20 hours on the transaction. CPA rates can range from $200 to $600 per hour, and the more your business is worth, the more sophisticated and expensive your CPA should be.
Other Advisors and their Fees
Personal Wealth Advisor fees – Regardless of whom you sell your business to, you should consult with your financial advisor before you start the process. (If you don’t have a financial advisor already, you should hire one.)
Specifically, you’ll want to discuss how the proceeds of your business sale will affect your retirement or post-sale life. It’s critical that you understand, well in advance, how much money you will need from the sale; this way you can match that figure up to your estimated after-tax sale proceeds in order to eliminate nasty surprises after the transaction.
Most financial advisors will develop a financial plan for you at no charge if you also allow them to manage your investment accounts. The annual asset management fee (typically 1% of total assets under management) often covers the cost of planning. Some advisors require a minimum level of assets, so be sure to check with yours before you engage them to prepare a plan for you.
The key to a successful sale is a combination of preparation, planning, and having the best team in place to assist you every step of the way. To help you manage your exit process and your dream team, we always recommend that owners work with an experienced exit planner. They often act as the quarterback of the team to ensure that all work is completed on time and that your goals and objectives are the focus every step of the way. They can also provide access to specialized advisors for your unique business situation.
In our next articles, we’ll discuss the different types of exit planners, their associated costs and fees, as well as a case study about how assembling a dream team made all the difference for one exiting owner.
This list of advisors is not all inclusive and may vary depending on the type of transaction and specific situation. Assemble a well-rounded team of advisors that will work collaboratively to help you achieve your desired outcome. Do your due diligence on them and select trained, qualified advisors who have the tools, resources, and objectivity to assist you with this process.
If you need help assembling your exit planning dream team, please contact us. We have a network of trusted advisors across the country. Let us help you find the right advisor for your specific situation!