How Much Money Do Business Brokers Make?
While the best in every high commission profession can make a lot of money, like several hundred thousand to even over a million in annual earnings, the road to getting there is typically longer in business brokerage than in residential or commercial real estate. Average income for business brokers will skew very low due to the length of time it takes to build momentum and consistency, which in turn causes higher turnover than in the real estate professions.
There is no centralized resource with a large amount of data on business broker earnings. There are a few stats put out by job boards which involve feedback from what I would guess to be relatively small sample sizes. And there are many anecdotal responses to this question and so I’ll add my own. With exposure and visibility to a number of active business brokers, I estimate that less than 20% of business brokers net six figures and the percentage of all business brokers netting over $500,000 is in the low single digits.
In this article, I’ll shed light on some outliers who demonstrate that the potential earnings are extremely high. But we must recognize outliers for what they are. Realistically, most of us mere mortals do not have the ability or desire to do the things that the super-producers do.
It’s important to understand how business brokers make their money. With this information, you can set off to do your modeling. It is also important to understand if you will enjoy the profession. See Pros and Cons of Being a Business Broker.
How Do Business Brokers Get Paid?
Business Brokers get paid most commonly via a success fee or a commission at closing similar to real estate professionals. The commission is a percentage of the closing price. However, many business sales contain a deal structure, which is a fancy way of saying the seller does not get paid all of the purchase price at the closing. Future payments of the purchase price may be structured as seller financing or earnouts. Depending on the terms of the listing agreement, the business broker might get paid entirely at closing regardless of deal structure, or as the seller gets paid. Some business brokers charge an up front fee, but this is more typical of M&A advisors on larger deals. Let’s look at all the ways business brokers get paid.
How Do Business Brokers Charge for Their Service?
There are a few ways brokers and M&A advisors can charge for their services including success fees (or commissions), minimum fees, up front fees, consulting fees, and retainers.
Commissions for Business Brokers and M&A Advisors
A common commission is 10%, although this is not a default or standard since commissions are set in the free market. On the high end of the scale, you will find business brokers comfortable charging more for their services. On the low end of the commission range, you are likely to find professionals from other fields that are not dedicated to business brokering, such as residential and commercial real estate professionals and sometimes even attorneys.
The justification for the higher commissions in business brokerage relative to real estate are higher complexity to lower success rate. In fact, some business brokers charge as much as 15-20% and almost all business brokers have a minimum fee at closing regardless of the sale price. Just as in real estate, commissions are paid by the seller and are negotiable.
Similar to real estate organizations, business brokerages are set up with brokers and agents. The broker-owner typically collects a fee for each transaction and if they are part of a franchise, they pay a franchise fee. The agent or agents of the transaction keep the rest.
Commissions are set in the free market so each business broker can set their commission as they see fit. Nonetheless, the most typical real estate commissions are 5-6% charged to the seller and the most typical business brokerage commissions are 10-12% charged to the seller.
On the low side, low real estate commissions or flat fees can be found from discount brokers and flat fee brokers. In business brokering, commissions may be as low as 6%. This can happen on deals where a residential or commercial real estate agent is listing a business and is accustomed to charging 6%. The seller needs to be sure the real estate agent is capable. A 6% commission can also happen on larger deals. M&A Advisors often use a tiered commission structure that starts at 10% on the first $million in sales price, then 8% on the next million, and so forth stopping at either 6 or 4%. However, these same advisors may also charge an up front fee.
Some creative commission structures include stepped commissions that go by the names Lehman Formula, Double Lehman, Modified Lehman, and Reverse Lehman. I use a common modified formula that charges 10% on the first $1million, 8% on the second $million and 6% on the balance. Using this formula, the effective rate is 8% on a $3 million sale, 7% on a $6 million sale, and 6.6% on a $10 million sale. I chose this commission structure since I do not charge up front fees, which can be risky for sellers.
For business in the gray zone between business brokerage and M&A, with revenue between $5-25 million, sellers need to use discretion selecting the right intermediary, the right fees, and the right approach to selling the business.
Business Broker Minimum Fees
Most business brokers will have a minimum fee typically anywhere from $10,000 to $25,000. As an example, if a broker has a success fee of 10% and a $15,000 minimum, he’ll make $30,000 on a $300,000 sale and $15,000 on a $100,000 sale.
Some brokers who choose to focus on higher end business brokering may set their minimums even higher. Some may set them lower, perhaps for certain situations such as facilitation of a deal where the buyer was procured by the seller.
Up Front Fees For the Sale of a Business – Beware!
Most business brokers do not charge up front fees while most M&A Advisors do. If you have a small business under $1M in revenue, be wary of up front fees as they are not common and not required by most brokers for an opinion of value. If you have a business over $10M in revenue, up front fees are more common. If you’re in the middle, use your discretion. M&A Advisors moving down into your size range may charge significant up front fees of tens of thousands of dollars for fancy reports that are of little value at your size.
They may provide lengthy reports which include a business valuation and exit plan. Large companies may find value in these reports and have the budget to pay tens of thousands of dollars up front before the business is even on the market. However, some M&A firms have migrated downward to smaller businesses with revenue in the $1-$10M revenue range. They bring their M&A practices which include up front fees, listing businesses for sale with no price, and sometimes a risky auction-style sale.
I have met many business owners in this size range that have told me they spent $20,000, $30,000, $40,000 and sometimes more for a fancy report and their business never got sold. These businesses are at the intersection between higher end business brokers and lower end M&A advisors. These up front sums are significant for these owners. The M&A firms often conduct fancy meetings at hotels and pitch their approach, promising to credit the up front fee toward the commission when the business sells. This seems like a good deal to business owners who are not aware that the odds are stacked against them. A small percentage of businesses listed for sale will actually sell. This is a case where industry insiders are taking advantage of their insights to capture revenue up front knowing that they are unlikely to succeed at selling the business.
Some business brokers have decided to charge up front fees in much smaller amounts for business valuations, often offering a credit toward an eventual sale. Again, they are taking advantage of statistics stacked against the owners, but at least the sums are much smaller, typically in the range of $500 to a few thousand dollars.
Monthly Listing Fee for FSBOs
A few brokers charge a monthly listing fee to FSBOs. This isn’t necessary for FSBOs because FSBOs can access all of the same listing sites as a business broker. This is different from real estate where only real estate agents can list on the MLS. Yes, the FSBO will have to pay a fee to the listing platform and upload their business information to a platform like BizBuySell, but this fee will be lower than the monthly fee charged by the broker to list a FSBO business.
Co-Brokering
Unlike real estate, commissions on a deal are most often earned by one business broker versus two agents in a typical real estate transaction. In business brokerage, the agent is typically called a business “broker” regardless of license status and typically represents both buyer and seller. In real estate, the titles of agent and broker are strictly defined by the professional’s license type. Furthermore, there are typically two real estate professionals splitting the commission.
Business Broker Consulting Fees
Consulting fees are not common among business brokers and are more common among M&A advisors. Here is a list of possible consulting work.
- Valuation
- Exit Plan
- Transaction Assistance When Seller Found the Buyer
- Consulting preparation for a sale
- Tips for cleaning up accounting and record-keeping
- Recommendations to address customer concentration issues
- Succession planning advice
- Guidance on inventory, receivables and payables
Fees Paid by Buyers: It is uncommon for business buyers to pay broker fees. Some brokers may charge a small transaction fee at closing of a few hundred dollars. This is taken from a common practice in real estate, but it’s essentially a junk fee. Large sophisticated active buyers are the exception to the rule as far as paying fees.
Retainer Fees for Intermediaries to Source Deals
Larger firms seeking growth through acquisition may hire an M&A advisor on a retained search paying thousands of dollars per month. M&A firms will have a dedicated client contact searching for acquisition targets and providing regular activity reports to the buyer. Business brokers typically do not have the bandwidth or experience to charge for this type of service.
Can Business Brokers Earn a Salary?
A business broker’s salary is zero. Business brokers have to hustle to make money just like real estate agents, but there are some major differences. In real estate, there are business models where real estate agents do get paid a salary by the company. The most prominent example is Redfin. There are currently no models like this in business brokerage and in my opinion, I don’t think a model like that can be supported by the industry. Even In the world of mergers and acquisitions, most M&A advisors are entrepreneurs or part of small firms and not making salaries. However, there are opportunities for intermediaries to earn a salary on the high end of the deal size spectrum. M&A bankers or investment bankers work on much larger deals and starting salaries are in the six figures. However, these jobs typically go to top graduates of prestigious business schools.
How Much Can A Business Broker Commission Be?
Business brokers can make $10,000 – $15,000 on the smallest deals because that’s where their minimum commission may be. They could also make $1M on one transaction although that would be very rare and if it did happen, it could have been years in the making, and is likely to be achieved by a seasoned high-end business broker.
I worked with a couple that made a few large commissions in a banner year, the highest near $1M in gross commission. They revealed that one of the deals was several years in the making, and after seven years as partners in the business brokerage, they had finally hit a string of “game-changing” commissions. The question going forward would be consistency. No one, including them, expected the results to be repeated consistently going forward.
Are There $1M Business Brokers?
Another agent in my franchise network was consistently a top producer for the franchise and within the IBBA. He was a high volume business broker. While he had his share of large deals, he had many bread and butter main street and even minimum commission deals. He made IBBA’s Broker of the Year very early in his career.
This was a consistent $1M broker who was generous with his time and tips to other brokers and agents. However, if you’ve been around extremely high producing sales stars, you might agree with me when I say some people just aren’t replicable. They do the things others can’t or won’t do. I feel most brokers or agents will take a few years to achieve a six figure net income. And for those fortunate enough to break six figures in the first or second year, only a handful will just go up from there. The majority will experience a disappointing year or two before reaching consistency or leaving the industry.
In residential real estate, there are many examples of $1M agents (gross earnings). They are a small elite percentage of the total REALTOR population, but they exist and most agents personally know one or two of them. Again, most of them will not be replicated by the majority of hopeful agents. In my opinion, the odds of becoming a $1M business broker are even lower.
Are the Financial Rewards Worth the Risk of Long Droughts?
Before considering business brokering as a career, you have to assess your will power and staying power, i.e. your financial runway.
The reality is that business brokering is a difficult profession because of how challenging it is to close deals. One seasoned business broker who gives back to the brokerage community said on a podcast, “I feel like that first year is very difficult. Some stuff starts to roll in during the second year, and the third year is when you finally see a little more consistency.” When I heard this as a newer broker and a member of a mastermind group of other brokers all in our first, second, or third years, we felt this statement had merit. That was until I heard another seasoned broker and industry mentor say “Some people say it takes a few years to get going in business brokering.” My ears perked up anticipating he would share the secret sauce on how to succeed sooner. He followed up with “I believe it takes longer.”
Still intrigued? See How to Get Started as a Business Broker and The Inescapable Truths of Buying or Selling a Business.