Selling a business involves more than simply handing over the keys and depositing a check from your buyer. To reduce or eliminate financial surprises when selling your business, you should ask your business broker about the cost to sell a business and what expenses you should realistically expect during the sales process.
The largest expense in the sale of your business will likely be the success fee paid to your business broker. Fees on Main Street business sales with an enterprise value (sales price) of less than $1 million range from 8% to 12%. Beyond the million-dollar threshold, most brokers implement a graduated percentage scale – with lower percentages paid as the sales price increases. These are known as The Lehman Scale or Double Lehman Scale and are customary in the Lower Middle Market generally defined as those businesses with annual sales between $2 million and $20 million. For example, while the fee on a $1 million sale is 10%, the effective percentage on an $8 million sale is closer to 5%.
Transaction Attorney Fees
Attorney’s fees can range from under $3,000 on a simple transaction where the attorney is acting as a Transaction or Escrow Attorney to well over $20,000 for a complex transaction where both buyer and seller have retained counsel to represent their interests. In transactions where the attorney is acting solely as an escrow agent, it is important to understand that they are not representing the interests of either party, but rather ensuring that the transaction is closed correctly. In these situations, the Escrow Attorney acts as sort of a referee rather than a coach.
Business sale transactions which do not involve a lender and where the sale price is less than $100,000 may be handled appropriately by a transaction or escrow attorney. However, if you are providing Seller Financing it is critical that you as the seller have competent legal representation to both draft the promissory note and represent you should the buyer have a hiccup in their regular payments to you. Like all financial obligations, sometimes a payment may be late or missed. Speaking from experience, I can tell you that once the payment goes beyond 21 days late, especially with a lack of communication from the buyer, it is time to call your attorney. Once involved, they usually can induce the buyer to get back on track.
Lease-Related Fees
Landlords are notoriously difficult to work with when ownership of a business is being transferred; they hold a position of power – and they know it. Landlords, like most people, like predictability – especially when it comes to timely rent payments. A seller with a consistent payment track record is much more attractive to a landlord than the buyer, who potentially poses a risk due to unknown payment habits and history.
While a landlord may not unreasonably decline to grant a lease assignment, they can sour a deal by foot-dragging or falsely declaring that the buyer is not to their credit standards. Most lease assignment applications include a provision that the landlord has 30 days in which to grant or decline the assignment. Lease assignments can include a transfer fee ranging from $1,500 on the low end to five-figures on large leases. Sometimes landlords decline to assign a lease – and instead offer to terminate the seller’s lease and enter into a new lease with the buyer. This is perhaps good news in getting the transaction completed but beware of a possible lease termination fee which could equal several months’ worth of lease payments.
Early Termination Fees
Another factor that may affect the cost to sell a business is early termination fees. Over the course of a business’s lifetime, a seller may have placed debt on the business in the form of an equipment lease or a business loan. Often, these instruments will include a prepayment penalty. When preparing your business for sale, it is critical to review all your business’s financial obligations to fully account for fees that a change in ownership may trigger.
Franchise Transfer Fees
Franchisors are consistent when it comes to charging a fee for the transfer of a franchise. As a seller, it is important to understand your financial liability arising from the transaction, as well as to advise the buyer of additional fees such as a franchise renewal fee. While this fee is outlined in the Franchise Disclosure Document (FDD), a seller should disclose to the buyer when the current term of their franchise relationship must be renewed, as well as the fee involved.
Local Transfer Taxes
Depending upon your state’s laws, you may be responsible for transfer taxes, regardless of whether the business does or does not include real property. Checking with your state’s tax commissioner’s office is always a wise idea.
In Closing – When Selling A Business
The cost to sell a business includes a number of fees that you might not have considered. A competent business broker will outline these fees and costs prior to closing – and again at the closing table. When trying to determine just how much you will pocket from the sale of your business, it is important to understand that various fees will impact what ultimately ends up in your bank account.
Gregg Kunz is a Colorado Business Broker. He has both CBI and Master M&A Intermediary designations. Prior to becoming a business broker, Gregg held executive leadership positions in Fortune 500 companies where his responsibilities included building and growing successful sales organizations. He is the principal broker at Rocky Mountain Business Advisors, a Denver Business Broker, and is widely considered an expert in Mergers & Acquisitions. Contact Gregg at 303.474.5582.