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Business Broker and M&A Advisor Fees: A Comprehensive Guide

by Jacob Orosz (President of Morgan & Westfield)

Executive Summary

How much do most brokers and M&A advisors charge? What is the ideal fee structure so that the broker’s interests are aligned with yours? Can a broker’s or M&A advisor’s fee arrangement cause bias or misaligned interests with you, the business owner?

Here’s an overview of typical fees charged for selling a business based on its size.

Small Businesses Priced Under $5 Million: Most brokers charge a flat 8% to 12% commission if the business is under $1 million and charge a lower rate for businesses priced from $1 million to $5 million. Most follow the so-called “Double Lehman” or “Modern Lehman” formula, or some version thereof:

10%-12% on the first million, plus

8% on the second million, plus

6% on the third million, plus

4% on the fourth million, plus

2% after that.

If a business sells for $5 million, the fee would be: $100k (10% on the first million) + $80k (8% on the second million) + $60k (6% on the third million) + $40k (4% on the fourth million) + $20k (2% thereafter) = $300k. Most business brokers charge a minimum fee between $10,000 and $25,000 and work on a straight commission. A minority of brokers charge an up-front fee, but the more experienced the broker is, the more likely they are to charge up-front fees as a general rule.

Mid-Sized Businesses Priced from $5 Million to $100 Million: Most M&A advisors charge up-front fees, in addition to a success fee. Usually called a retainer, the up-front fee varies from as low as a few thousand dollars to more than $50,000. Most have a minimum fee in the range of $50,000 to $250,000. The most common fee structures are the Lehman and Double Lehman formulas, a compensation structure developed by former investment banker Lehman Brothers decades ago.

Lehman Formula:

5% on the first million, plus

4% on the second million, plus

3% on the third million, plus

2% on the fourth million, plus

1% after that.

Double Lehman Formula:

10% on the first million, plus

8% on the second million, plus

6% on the third million, plus

4% on the fourth million, plus

2% after that.

The purpose of this article is to provide you with:

An overview of the industry and who is involved in the process of selling a business and how much each charges, including business brokers, M&A advisors, investment bankers, business appraisers, and professional advisors.

An outline of how most business broker and M&A offices are structured and how their structure impacts their fees — including solo offices, small offices, large offices, and franchised offices.

An overview of the typical fees for businesses priced under $5 million and those priced above $5 million.

An explanation of how most brokers and M&A advisors structure their fees and what impact that can have on you.

Specific advice on selecting and hiring a business broker or M&A advisor to sell your business, and negotiating their fees.

Fees for Selling Your Business — An Industry Overview

Before we discuss fees, let’s first provide you with an overview of the individuals operating within the industry.

There is a diverse array of individuals who sell businesses, and they can be broken down into several categories.

Business Broker Fees

Business brokers sell the majority of small businesses, or those priced under $5 million. There are approximately 5,000 to 10,000 full-time business brokers in the USA from various backgrounds, from sales to marketing and finance. According to the International Business Brokers Association, many business brokers are former entrepreneurs, with an average age in their mid 50’s.
Most business brokers specialize in selling small businesses; however, the more experienced and knowledgeable a business broker is, the more likely they are to sell mid-market businesses, thereby effectively becoming an M&A advisor. Most business brokers are generalists and do not focus on one specific industry.
Most business brokers work on straight commission, but the more experienced they are, the more likely they are to charge up-front fees.
Many business brokers operate both in the Main Street market (composed of small businesses) and middle markets (composed of larger businesses, or “M&A”).
Most solo brokers and office owners are full-time brokers, although there are a number of part-time agents who work in offices.
There is a significant amount of knowledge required to sell a business, and there are few formal training programs available. Due to the low barriers to entry to become a business broker, many people enter the industry expecting to make quick money but underestimate the amount of knowledge required to properly sell a business. As a result, many brokers quit within the first few years, so the turnover in the industry is therefore high.

M&A Advisor Fees

M&A advisors specialize in selling mid-sized businesses, or those generally priced from $5 million to $50 million (there is no universally agreed-upon range). There are approximately a few thousand M&A advisors in the United States. Although the majority of M&A advisors represent sellers, there are some who focus on representing buyers.
Most M&A advisors work solo or as part of a boutique firm. There are a few larger firms that specialize in the lower middle market, but they are in the minority. Some M&A firms focus on specific industries, though the majority are generalists. Many firms offer additional services, such as financing, recapitalizations, and management buyouts, but these are all ancillary services for most firms.
Most M&A advisors charge up-front fees, sometimes called a retainer, in addition to a success fee. Some may also charge a monthly retainer. Typical success fees range between 2% and 8%. Common fee arrangements include the Lehman and Double Lehman formulas, which charge a higher percentage on the first few million (e.g., 8% on the first million), and a lower percentage on successive amounts (e.g., 6% on the second million, 4% on the third million, etc.).
As a general rule, most M&A advisors are much more knowledgeable than business brokers because there is a higher level of knowledge required to sell a middle-market business than a small business.

Exit Planners Fees

Interestingly enough, there is a large divide between those who sell businesses (i.e., M&A) and those who prepare businesses for sale (a fragmented collection of other professionals). There is little crossover between those who prepare businesses for sale and those who sell businesses. In other words, those who help entrepreneurs prepare their business for sale don’t normally help them sell the business, and vice versa. As a result, there is often a disconnect between exit planning and the actual exit for most entrepreneurs. Also, how can an exit planner advise the seller on preparing their business for sale if they are not actively engaged in the marketplace and are not familiar with the buyer’s preferences?
Few business brokers and M&A advisors assist entrepreneurs in preparing their businesses for sale. Our hypothesis is that doing so requires a different mindset, a different set of skills, and different processes. Processes and tools need to be created to advise owners. We will go into detail later in the article about how most advisors simply don’t have the manpower to create the processes due to how most offices are structured.

Investment Banker Fees

Investment bankers specialize in selling larger businesses, typically those generating more than $100 million per year in revenue. You should be aware that the term “investment banker” is regularly and loosely used by M&A advisors to identify themselves due to the lack of a catchy moniker for those specializing in the middle market — “M&A advisor” sounds clunky.
Many of their clients include publicly traded companies. Investment banking firms also offer many other services, such as asset management, trading, equity research, raising debt financing, IPOs, and banking.
There are fewer investment banking offices than M&A firms. Most investment banking firms are larger and have more support staff, though there are some boutique firms in the lower end of the market with between $100 million and $250 million in revenue.

Franchise Broker Fees

Franchise brokers sell “new franchises” that are not currently operating. For example, a franchise broker may sell the rights to a Dairy Queen franchise to an individual and then earn a commission on that sale. The commission paid to the franchise broker is usually generated from the “initial franchise fee” that the franchisor charges the buyer. The buyer pays the initial franchise fee and other startup costs to the franchisor, then pays an ongoing royalty to the franchisor as a licensing fee to use the franchisor’s intellectual property (e.g., name, processes, and other trade secrets). The commission rate is normally determined by the amount the franchisor is willing to pay, which normally ranges from $15,000 to $40,000 for a single-unit franchise.
Most multi-unit franchises (e.g., restaurants, hotels, motels) sell to another operator within the franchise system and do not require the services of a franchise or business broker.
Most franchise brokers are not knowledgeable about operating businesses. It is not common for franchise brokers to sell “resales” or operating franchises currently being sold by an owner. These are normally handled by business brokers on a local basis.
Franchise brokers may represent hundreds of franchisors. They will consult with a buyer and then refer the buyer to franchises they believe are a good fit. If the buyer buys a franchise, they then earn a commission. Most franchisors rely heavily on organic traffic and traffic from franchise brokers.

Residential Real Estate Agent Fees

While it was common in the past, it is becoming rare for a residential real estate agent to sell a business. The most common exception is for retail businesses in rural areas that do not have a local business broker.
Most residential real estate agents don’t have the knowledge, experience, or processes to properly sell a business. Most real estate agent office owners recognize the liability incurred in doing so without adequate knowledge and prevent their agents from selling businesses due to the potential liability.

Commercial Real Estate Agent Fees

Many commercial real estate agents sell businesses with a real estate component, such as hotels, motels, or storage units. Some commercial real estate offices are active in the business marketplace, though the majority consider this a minor segment of their business. Most commercial real estate agents charge a 4% to 6% commission, with declining amounts as the purchase price increases. Most work on straight commission, though there are a few who charge up-front fees.
We find it’s best to hire a specialist if you have a business with a substantial real estate component. For example, if you own a hotel, hire a hotel broker. There are many agents who specialize in hotels, motels, storage units, gas stations, and car washes. However, It may be difficult if you are located in a smaller state, as every state requires a real estate license to sell real estate. You may need to hire an out-of-state broker who can cooperate with a local broker. Most states’ real estate departments allow an out-of-state broker to cooperate with a local broker if they are not licensed in the state.

Business Appraiser Fees

Most business appraisers only value businesses for tax or other legal reasons. They rarely sell businesses, but most will appraise a business for any owner, for any purpose, including for exit planning purposes. In our opinion, it’s best to hire someone active in the marketplace (i.e., who sells businesses) as they will be able to best advise you on how to increase the value of your business, and their knowledge will not be purely theoretical.
Appraisals can cost $1,000 at the very low end for a verbal opinion of value, up to $5,000 to $10,000 for a company doing $5 million per year, and up to $20,000, or more, for larger companies.

Professional Advisor Fees

There are many professional advisors who are a critical component in the sale process, such as accountants, attorneys, and financial advisors. They may advise the owner to varying extents regarding the sale process. Some CPA firms have specialty M&A departments. Most professional advisors charge by the hour, while a minority charge a flat fee. The majority that charge a flat fee are experienced in the process, hence the reason they charge a flat fee — they understand the process enough to be comfortable quoting a flat fee. When hiring a professional advisor, experience is critical. Ask the advisor how many clients they have advised in the process of selling or buying a business. A second consideration is cooperation. You want an advisor who is able to get a deal done and is able to balance risk-taking with the costs of doing a deal.

How Are Most “Business Broker and M&A” Offices Structured?

Knowing how an office is structured is important because it tells you how that business operates and the level of skill, knowledge, and professionalism you can expect. Incentives are also important to consider. While the reputation of the firm is important, what matters most is the individual you are hiring, not the office.

Following is a list of how most offices are structured:

Solo Offices

Solo offices are operated by one broker, possibly with an assistant, though most solo brokers do not have any support staff or assistants. A solo broker must be a jack of all trades and must do everything themselves.
The average solo business broker might have 10 to 25 listings, while a typical M&A advisor might have just a few clients. Many industry specialists also happen to be solo operators.
You are more likely to find someone experienced who is a solo operator than someone who works in a large office.

Small Offices

We consider a small office to have fewer than 10 agents. Most offices have less than 10 agents, and the majority of offices could therefore be characterized as small.
In most cases, the office owner either started the office as a franchise and hired other brokers from the outset, or started solo and added a few agents as the business grew. The office may have an office manager or assistant, but most small offices have few support staffers.
In most small offices, the owner is an active broker and manages the staff part-time. If you hire a broker who is also an office owner with agents, realize their time is split between managing the business and selling businesses. The more agents the broker has, the more likely the owner is to be a full-time manager.

Large Offices

We consider a large office to have more than 10 agents. Most large offices have an office manager and a full-time person who manages the agents, or the owner manages the agents. The majority of large offices have little support staff — the majority of individuals in the office are brokers.
Some training may be offered, and there may be some standardized processes, but the brokers are on their own for the most part.
The office owner’s objective is to hire as many brokers as possible since the overhead on each agent is very low. Almost no offices pay salaries, with the brokers working on straight commission, so the office owner has little to lose.
Payouts to agents range from 50% to 70% or more in most cases. Some offices charge a desk fee, and some do not.
The least experienced people in the industry tend to be agents at larger offices. This is where most people gain initial experience in the industry before branching out on their own.

Franchised Offices

A franchised office can be solo, small, or large. The only difference between a franchised and a non-franchised office is that a franchised office uses common names, processes, and forms. However, each office operates independently. In other words, there may be significant variability between how two different franchised offices operate. As an example, we know of some top franchise offices that do not use the franchisor’s name, forms, processes, or tools. We know of one office that does so only to claim that “we are part of the largest broker network in the world” — which is a meaningless claim in our humble opinion because franchised offices are part of a very loose connection of independent offices.
The goal of the franchisor is to sell franchises. Some have no experience selling businesses. They generally offer from 1 to 2 weeks of training, and then the office owner is on their own.
A franchise is a loose network of independent offices that all operate differently from one another. While they may appear similar on the surface, once you dig deeper, you will see tremendous differences in operations from office to office. In this case, bigger is not better. Many of the top offices are independent, and there are almost no franchised M&A offices. Some may claim to be, but they are likely hybrids as most M&A advisors steer clear of the stigma associated with franchising in the middle market.

Business Broker, M&A Firm, and Investment Banking Fees

Following is an overview of typical fees charged for selling a business based on its size:

Fees for Small Businesses Priced Under $5 Million (Main Street)

This market is primarily handled by business brokers.
Most brokers charge a flat commission between 8% and 12% if the business is under $1 million and charge a lower fee for businesses priced from $1 million to $5 million. Most follow the “Double Lehman” or “Modern Lehman” formula, or some version thereof:
- 10%-12% on the first million, plus
- 8% on the second million, plus
- 6% on the third million, plus
- 4% on the fourth million, plus
- 2% after that.
If a business sells at $5 million, then the fee would be: $100k + $80k + $60k + $40k + $20k = $300k.
Most business brokers charge a minimum fee of $10,000 to $25,000, regardless of the sale price for the business. For example, if a business sells for $50,000, the broker’s fee would be $25,000.
Most business brokers work on straight commission. A minority of brokers charge an up-front fee, but the more experienced the broker is, the more likely they are to charge up-front fees as a general rule.
Most business brokers have no incentive to improve the value of your business due to the fee structure. A straight commission model incentivizes the broker to sell your business as fast as possible with minimal effort.

Fees for Mid-Sized Businesses Priced from $5 Million to $100 Million (M&A)

Most M&A advisors charge up-front fees, in addition to a success fee. The up-front fee, usually called a retainer, varies from as small as a few thousand dollars to more than $50,000. Most advisors have a minimum fee in the range of $50,000 to $250,000.
The most common fee structures are the Lehman and Double Lehman formulas.
- Lehman Formula:
  - 5% on the first million, plus
  - 4% on the second million, plus
  - 3% on the third million, plus
  - 2% on the fourth million, plus
  - 1% after that.
- Double Lehman Formula:
  - 10% on the first million, plus
  - 8% on the second million, plus
  - 6% on the third million, plus
  - 4% on the fourth million, plus
  - 2% after that.
- There are other variations on the Lehman and Double Lehman models. For example, some M&A advisors may begin at 8% on the first million and level out at 4%.

Factors to Consider When Hiring a Business Broker or M&A Advisor

Does the broker work solely on commission?

Brokers who work solely on commission are disincentivized from spending time. A flat commission model incentivizes a broker to sell your business as quickly as possible with the least amount of effort expended. If you do not want to be rushed, you may be more suited to work with a broker who charges up-front fees in addition to a success fee.

Brokers who work on straight commission must also pad their fees to account for the businesses they take on but do not sell. For example, if the broker has a 40% success rate, the broker must find a way to receive compensation on the 60% of the businesses they do not get paid on.

A broker who works on straight commission may also cause problems with professional advisors or other third parties. Many third parties, such as franchisors, landlords, accountants, attorneys, and financial advisors, are suspect of anyone working on straight commission.

A straight commission structure can also cause bias and misalignment between the owner and the broker. The more time the broker invests in selling your business, the more they will feel the need to recoup their investment. A broker who charges an up-front fee for services will feel this pressure to a much lesser extent, and your interests are more likely to be closely aligned with the broker’s interests.

Does the business broker or M&A advisor charge up-front fees?

Many business brokers claim that “up-front fees are bad” and should be avoided at all costs. Their premise is that “only salespeople who work on straight commission should be trusted,” which we shouldn’t have to tell you is a weak premise at best.

Based on their premise — accountants and attorneys shouldn’t be trusted because they don’t work on straight commission, and car salesmen should be trusted only if they work on commission. Most professionals are fee-based, but due to the nature of an M&A transaction, few business owners would be willing to pay tens or hundreds of thousands of dollars in fees only to have a transaction fail at the last minute. As a result, most M&A advisors charge fees for services along with a success fee on the back end. Many business brokers are slowly migrating to this model as well.

Upfront fees should not be charged if no service is being provided. For example, if a broker requires a $5,000 retainer fee and does not provide any specific service for this fee, then it is not recommended.

However, the truth is that the more experienced the broker, the higher the likelihood they will charge up-front fees, especially if they invest a significant amount of time preparing and packaging a business for sale. It’s also common for M&A brokers to charge large retainer fees, but you never hear anyone saying this is bad. Most M&A advisors invest significant time preparing and packaging a business for sale, and they are therefore reluctant to do so without being paid upfront for their expertise. Most business brokers make the claim that upfront fees are bad and avoid them because they don’t have the processes and staff to provide enough value to justify charging upfront fees. They wouldn’t claim they were bad if they could justify charging them.

Does the broker or investment banker have support staff, or do they do everything on their own?

The most professional brokers and offices have support staff and rely on a team of both internal and external experts. Selling a business is a difficult multi-disciplinary task that requires an enormous amount of skills in disparate areas. The most efficiently operated offices have developed scalable systems for the repeatable elements in the sale process, such as financial analysis, valuation, marketing, packaging, screening buyers, and closing, with each process handled by an expert in that process. The best offices we have seen operate like a surgeon’s office, where the most experienced advisors handle the most complex tasks, while a variety of other staff members deftly execute well-documented and defined processes within a flexible framework.

The size of support staff has an enormous impact on the level of professionalism the broker and their office demonstrates and the quality and efficiency of your transaction. Generally speaking, the more support staff the office has, the higher the skill level of everyone involved. After all, it’s easier to specialize in specific areas than to try and be an expert in all areas.

Are they able to customize their services, or do they have an “all or nothing” service model?

Every business is unique and should be handled as such. Ideally, your advisor should work within a customizable framework, but if all services are 100% customized, the process will become too inefficient. The ideal scenario is hiring a boutique office that exclusively focuses on selling businesses, has an experienced support staff, and also has a customizable framework, such as our 4-Step Process.

What are the terms of their agreement?

Brokers working on commission must recoup their up-front investment of time and will therefore require an exclusive long-term agreement to ensure they have ample opportunity to sell the business on an exclusive basis in order to recapture their up-front investment of time. The only time you will find a broker willing to offer you a non-exclusive agreement is if the broker is inexperienced or if the broker is fee-based, such as with us. If they are fee-based and they are being paid for their services as they are provided, then they will not feel the need to recoup their investment in the form of a long-term exclusive agreement.

Most broker agreements require paying them the full fee if you remove your business from the market (i.e., you change your mind), so be 100% sure you want to sell if such a clause exists. (We do not have this requirement.)

Can they help me with exit planning, or do they only sell businesses?

Only a minority of business brokers and M&A advisors help business owners plan their exits. Exit planning primarily consists of helping the owner improve the value of their business over time. Some prepare a formal exit strategy and valuation, while others help on an ad hoc basis.

Is the broker or investment banking firm local or national?

Most business brokers work on a local basis, while many M&A advisors work on a national basis. Ask yourself if the broker’s physical presence is necessary. In most cases, it isn’t. Most business brokers only work locally because they feel it is necessary to physically meet with buyers. Many do this to protect their commission. If you don’t need the broker to physically meet with buyers, then you do not need to hire a local broker.

Does the broker or advisor work full-time or part-time?

It goes without saying that you should only hire a broker or advisor who works full-time.

What is their stance on co-brokering?

Co-brokering, when two brokers work together on a transaction, is not common in the business marketplace, and the benefits of co-brokering are overstated. The only exceptions are within an office, though that is not true co-brokering.

Most buyers aren’t willing to pay a search fee or sign an exclusive agreement with a broker to perform a search which means they are not bound to working solely with one broker. As a result, most buyers end up searching for businesses themselves, which is why co-brokering is uncommon in the industry. Generally speaking, only inexperienced brokers perform searches for buyers without a fee. 95% of buyers never buy a business, and experienced brokers aren’t willing to work on those odds. Therefore, you could reason that, as a general rule, a broker approaching another broker to co-broker is likely less experienced than one who doesn’t.

Why Morgan & Westfield?

We believe we have created the most effective model in the industry that is based on the following factors:

Our fee structure is practical and sensible and aligns our interests with the business owners’ interests: Our fees are lower because we get paid like professionals. This fee structure reduces bias and conflicts of interest. We charge fees for services provided and a reasonable success fee if the business sells.
We do not require a long-term commitment: Unlike other brokers, we do not require any long-term contracts — you can sign up today and cancel tomorrow. You receive the benefits of experience without signing a long-term agreement.
Our services can be customized: All of our services are available on an a-la-carte basis, so you can choose how involved you would like us to be in the process. Whether you are a serial entrepreneur or a business owner who has never sold a business before, we can help you. The approach is custom-tailored based on your needs, using our proprietary four-step process for selling a business.
Our only specialty is selling businesses: We are experts at one thing. We don’t try to be all things to all people.
We have a large support team: We follow the professional service firm model and have a high ratio of support staff to dealmakers. As a result, our staff is more experienced, effective, and efficient, and you will have access to resources and professionals ordinarily available only at much larger, expensive firms. We take a team-based approach so you can have peace of mind knowing you have a large, professional team guiding you through the complex process of selling your business. And we are just a phone call away. This ensures a smooth, efficient process and eliminates potential deal killers.
We have taken a complicated process and made it simple: We have broken down the process of selling a business into clear, understandable, and easily executed steps. The process has been clearly organized into four distinct steps and has been proven to reduce the stress and time to sell a business by over 50%. Selling a business is hard, but we make it easy for you to understand the process and we quickly respond to your calls and emails. We are here for you every step of the way. Our professional approach guarantees we’ll handle your sale correctly.

Why are our fees lower?

We are more efficient. Our process is efficient because we have broken down the proceedings into a series of concrete steps, then perfected and documented them. These steps are then executed by a team of specialized in-house experts who are more efficient than a solo broker who tries to handle everything.
We work by phone and email only. This saves a tremendous amount of time and expense.
Because we are fee-based, you don’t pay for transactions that don’t close or services you don’t want or need. Brokers charge a high commission on sales that close to offset the time they invest in businesses that do not sell. If we worked exclusively on commission, we would not be able to afford a large staff because we would not know when our next transaction was closing.
- Imagine if you went to see a surgeon, and the surgeon did everything. They answered the phones, scheduled appointments, cleaned the office, answered emails, did the marketing, designed the website, and more. It is more efficient for the surgeon to focus only on what they do best, which is surgery, and to delegate everything else. Likewise, we have perfected the process of selling a business and have broken it down into concrete, documented steps performed by in-house specialists who focus on their work without expensive office space to maintain or time spent stuck in traffic. We enable our specialists to focus on what they do best at every step of the sales process.

If you are considering selling your business, get started today with a complete assessment of your company. The assessment is an unbiased evaluation of your business and includes a report on the potential value of your company, an exit strategy to assess your options, and an in-depth phone call to review your valuation and exit strategy.

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