How to Sell Your Business, page 19

Working with Brokers

1. What is the broker’s educational background?

2. What are the backgrounds of others in the broker’s firm?

3. Is the broker a member of IBBA or another trade association, and have they participated in industry training programs?

4. Do the broker and firm have experience with your industry?

5. Do they have experiences buying or selling businesses the size of yours?

6. Ask the broker to evaluate your business honestly. What might you have to do to facilitate a sale?

7. What specifically will the broker do for you? Consider asking for this in writing.

8. Ask them whether they represent the buyer or seller (see discussion below on this point)?

9. Ask about their fee structure.

10. Ask for references.

Fee Structures

Intermediary fees when selling a business are completely subject to negotiation—so, don’t hesitate to negotiate.

Normally, fees are paid at the closing, out of the proceeds at the closing. (These are sometimes called “success fees.”) In this respect, the commission transaction is similar to real estate sales fee—and it is sometimes noted that the only purpose of having the agent or broker present at the closing is so that they can be sure that they will collect their fee.

It is also not uncommon for there to be a retainer paid in advance, deductible from the success fees. This retainer could be paid in a lump sum, or, perhaps, on a monthly basis. It’s used to cover expenses such as creating a business plan, and should not be a huge sum.

One common success fee structure is what is known as the “Lehman Formula.” The Lehman formula is:

5% of the first $1 million of the sales price +
4% of the second million +
3% of the third million +
2% of the fourth million +
1% of the fifth million and amounts greater than $5 million

For example, on a $5 million transaction, the Lehman fee is $150,000, and on a $25 million transaction the Lehman fee is $350,000 (or 1.4% of the total).

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