The cost of selling a business can be minimal or take a considerable chunk out of the sales price. The deciding factors include the size and complexity of the business and whether the owner uses a broker or M&A advisor. Plenty of fees hit a business owner right out of the gate, including during the preparation phase. Some will be expected, but others might come as a surprise. When you ask: “How much does it cost to sell a business?” You don’t want any surprises.
This article will look at the costs from three angles: the professionals who typically work on a deal, the costs of transferring ownership, and the taxes.
People needed to help with the sale
A business owner might work with several professionals throughout the sale process, including attorneys, brokers, M&A (merger and acquisitions) advisors, and accountants. Each professional will have his own fee structure, which is often dependent upon the sale price. The larger the transaction, the higher the fees.
However, a business owner can save money throughout the process by getting all her documentation together and cleanly organized ahead of time. Otherwise, she’ll pay someone a fee for doing the same work.
Broker or M&A advisor
Two primary types of financial professionals help in the sale of a business: brokers and M&A advisors. The former typically operates on a smaller or more regional scale on deals worth $1 million to $2 million, like family-owned, small business sales. The latter more frequently works on larger, national, and international multimillion-dollar business sales that can be more complex, including mergers and sales involving multiple locations.
As such, the fees will be vastly different. Business broker fees are generally commission-based, which means no fees up front. On average, broker fees amount to roughly 10% of the business sale price. M&A advisors also charge a commission, but also might add additional fees.
Whether a business broker or an M&A advisor is involved, the business owner must weigh his options and seek estimates from multiple professionals to find the best fit in terms of both price and quality.
These types of bankers work on larger transactions and complicated sales. Typically, they’ll help with structuring an acquisition, merger, or sale for their client or with handling the issuance of securities or bonds to raise capital. Because of their market experience, investment bankers can help get a fair price for a business. They can also help find potential buyers, create marketing materials, evaluate bids and negotiate the terms of a business sale.
Most investment banks will charge a retainer fee plus a monthly advisory fee to support their efforts in the sale and to ensure that the seller stays focused on the sale. Retainers fees vary, and advisory fees are generally between $40,000 and $100,000 a month. That fee, of course, will depend on the transaction size and complexity of the sale.
Once a business sells, the investment banker charges a success fee, based on the sale price. The most common fee structure for success fees is called the Lehman Method, a declining percentage scale over breakpoints that is similar to this schedule:
5% of the first $1 million, plus
4% of the next $1 million, plus
3% of the next $1 million, plus
2% of the next $1million, plus
1% of the remaining purchase price
As with many aspects of a deal, these fees are negotiable. The more a business owner, or his advisors, knows about the details, the better the chances of finding areas for negotiation and accommodation.
Like an investment banker, an attorney will aid in negotiating a business sale and ensure proper protections are in place throughout the process. Attorney rates vary dramatically by law firm and location, and hourly rates can range from $500 to $800 an hour for a partner. Of course, associate rates will be lower, but a business owner should plan to spend $50,000 to $250,000 on legal fees.
An attorney may instead ask for a flat, upfront fee instead of one contingent upon the deal closing. These fees generally start around $30,000 and increase depending on the sale’s size and complexity.
The appraiser’s main goal is simple: determining the fair market value of a business. They’ll collect information about the business and any necessary real estate data to determine its worth. Appraisers can use one of three methods:
- Fair market value methods, which consider the value of all equipment, furniture, fixtures, vehicles, and intangible assets.
- Liquidation value, used when a business must be sold quickly.
- Capitalization of earnings valuation, which determines the value of a business based on projected future earnings.
Fees vary depending on method and market but generally come in at $5,000 to $30,000.
Costs associated with the transfer of ownership
When it comes time for a business to change hands, the owner often must pay transfer fees. The specific costs will depend on many different scenarios and be based on different aspects of the sale terms. We’ll list what some of those expenses can be and provide fee estimates for some.
Novation is part of the process of transferring a government contract with the current business owner to the new one. It takes a long time and can be costly, in part because it involves a great deal of paperwork. Novation involves the sale of assets with a provision of assuming liability, the transfer of assets in a merger or consolidation, and the contribution of assets in connection with a new business.
For a brick-and-mortar business, this involves making any necessary fixes or improvements to boost the marketability or future value of your business. Spending a little extra money to polish things up can translate into a larger transaction.
If real estate is included in the transaction, costs could arise such as land surveys to determine the boundary lines between parcels and EPA environmental assessments. The survey costs will depend on the size of the land and the type of survey. Generally, these fees can fall between $500 and $1,000 for simpler surveys.
These fees are common in the sale of a franchise. The fee will be paid by either the seller or buyer and could be a flat rate or a percentage of the sale cost.
Some leases can include an assignment fee, which would come into play when the business owner asks to assign the lease to a buyer. In this scenario, a landlord charges the fee to cover expenses they incur because of the lease transfer.
Sale of business fee in lease
This is another lease-related scenario. Landlords sometimes charge this fee, which is based on a percentage of the business sale or fixed value. Why? Because they put it in the lease, so they can.
This process is essentially an additional audit of a business’ finances over the previous two or more years. It serves to comfort the buyer by showing that the business is worth purchasing. It can also include reconciliation of tax returns, reviews of annual sales broken down into categories, annual revenues, and lists of standard product lines and regularly stocked items and its most recent cost per unit. These processes can cost anywhere between $5,000 and $50,000.
Data room services
Data room services are used to securely present all pertinent information to any potential buyers and can be physical or virtual spaces managed through software. Like many other aspects of the business sale, prices vary depending on the size and complexity of the sale, and virtual spaces tend to incur lower fees than physical spaces.
Do I pay taxes when I sell my business?
More often than not, a business owner can expect to pay taxes when the sale is concluded. And the size of the tax bill can overshadow all the costs that came before it. Here’s a breakdown of what taxes you can expect to pay and how you might account for profits on your tax returns.
No owner should begin the sale of a business without knowing what the tax implications will be. This is because well-advised structuring of the sale and placement of the proceeds can prevent a catastrophic tax bill. A business owner who fails to plan for this might damage not only his future but that of his family for generations.
The Internal Revenue Service does not view the sale of a business as the sale of one single asset. Rather, the IRS views it as sales of the business’ individual assets and taxes each one separately.
Thus, some assets will be taxed as ordinary income and some as capital gains. Proceeds treated as the former are taxed at the taxpayer’s individual rate, which tops out at 37%. If the proceeds are deemed capital gains, the maximum tax rate for most taxpayers is 15%.
After all those fees and federal taxes, the state and perhaps even localities stop by for a bite.
Tax planning must consider state taxes along with federal taxes. It would be awful to do everything else right only to have state taxes decimate the earnings from a sale. States might tax the sale of assets, the transfer of stock and the transfer of real estate.
The bottom line
Selling a business can be an intricate and lengthy process. For business owners who want to make it as profitable as possible, GovCon Wealth, a division of Cope Corrales, is ready to do the heavy lifting necessary for a great outcome.