There are two main types of charges when selling your business:
- Success Fees
A “success fee” is a fancy word for a commission.
A commission is a percentage fee on the sale price of your business. This fee is negotiated before you list with a broker and it's paid at closing.
"Retainers" are flat-fees paid in advance to secure the services of an M&A firm. They can be charged up front or by the month.
MIDSTREET TIPIf your business is under $25 million in revenue, beware of firms charging large up-front fees for valuations or consultations.
Now that you’ve got the basics, let’s discuss how the size of your business influences the price you’ll pay.Size Matters
While there are no strict definitions, most businesses fall into one of three
- Main Street Business - $0.00 – $1M in revenue
- Lower Middle Market - $1M – $25M in revenue
- Middle Market M&A - $25M+ in revenue
Each category has a different typical pricing model. Again, since everything is negotiable your results may vary.
Main Street Business Brokers
"Main Street" brokers usually handle businesses with revenues of $1,000,000 or less.
They usually charge 10% on the value of the business and 6% on any associated real estate.
Most do not charge retainers, but they may have a minimum commission fee of $10,000 – $20,000.
NOTESMain street deals are less complex than other transactions. Middle market and lower middle market deals may involve earnouts or minority buyouts that can complicate the commission structure.
Lower Middle Market Broker/Advisers
“Lower Middle Market” brokers usually handle businesses with revenues of $1M – $25M.
Most use the Double Lehman Scale for pricing, or a variation thereof (reverse Lehman, Standard Lehman Plus, etc.).
Double Lehman pricing charges 10% on the first million, 8% on the second million, 6% on the third million, 4% of the fourth million, and 2% on any remainder.
Firms at this level may also charge a flat commission of 4-6% on the entire sale price. If you do the math, there’s no difference between a 6% commission on a $5M sale price, and the Double Lehman pricing.
Some firms at this level charge retainers, but the majority do not. Lower middle market advisors usually have a minimum commission fee of $35,000 - $50,000.
Middle Market M&A
“Middle Market” advisors usually handle businesses with revenues of $25M+.
At this level, most success fees drop to a simple percentage, ranging from 1-4%. Some even drop below 1%. Firms may also use variations of Lehman pricing (scaled percentages) for middle market businesses.
The Easiest Answer
If you’re still not sure which category your business is in, we recommend using the Double-Lehman Scale: 10% on the first million, 8% on the second million, 6% on the third million, 4% on the fourth million, and 2% on any remainder.
This is the most accurate pricing model for most business owners.
Wondering what the sale price of your business will be? Check out our guide on SDE and EBITDA to get started on pricing your business.
You can also reach out for a free business valuation or give us a call and ask for help. We’d be more than happy to give some free advice or guidance.