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Business Broker And M&A Commission Primer

Posted by webtech on October 15, 2012
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real-estate-agent-handshakeWhen you are searching for a business broker who will help you manage the buying and selling of your real estate properties, you need to choose the very best brokerage firm for your very personal needs. You need to keep in mind that there is no one set of laws or regulations which determines pricing in the market. A business broker will normally charge a rate of commission which is set at an average of 10% (this is also sometimes referred to as a “success fee”). This commission accrues to the value of your business. There will also be a typical commission charge of around 6% on any real estate which is associated with that business.

However, there are some notable exceptions to this rule. For example, grocery stores, gas stations, and some hotels and motels can be charged at a somewhat lower rate of commission, perhaps around 3-4%, depending on the extent and value of the property. Some brokers can charge up to 12% and others will be prepared to lower their commission fee by a few insignificant points, in order to more quickly secure a deal. It all depends on the individual business broker that you are dealing with. However, most seasoned brokerage experts will hold steady to a set rate of about 10%.

Additional & Tertiary Brokers

Should an additional or tertiary broker enter the situation, the fee will most often be split between the sell-side broker (the broker involved in the buying of the business or property) and the listing-side broker (the business broker involved in the selling of the property). This will normally be the case when both brokers involved in this real estate deal decide to play ball and cooperate. Of course, the business being what it is, this is not always going to be the case. Some states seem to process brokerage deals in a spirit of mutual cooperation and team play better than others. Florida seems to be at the top of the cooperation list, while California traditionally resides near the bottom. As always, caveat emptor.

While 10% may seem to the seller to be an exorbitant price to charge as a commission, the reality is that this is simply what it takes to keep most brokerage firms in the business. The real estate is, as ever, completely unpredictable, despite all the reassuring noises the industry may wish to sound to outsiders. While 10% is the standard commission fee, you should still shop around before you settle on a specific firm or agent to broker your real estate deal. As noted above, you may yet find a broker who is willing to assist in the buying or selling of your property for a somewhat lesser rate. It certainly helps to have worked with a specific agent on a prior deal. Failing this, you can perhaps get a better commission deal on an agent or firm who you pledge via a “handshake” deal to continue to do business with on future real estate deals.

Lehman Scale

M&A commissions come into play when a property or business is being placed on the market place which is valued at over $1 million. At this juncture, the Lehman Scale should come into play. Many M&A firms will allege to the public that they do use the Lehman Scale, but this may be deception on their part. Some firms will use the Double Lehman Scale in this scenario. The Double Lehman Scale will pay brokers a commission of 10% on the first million, 8% on the second million, 6% on the third million, 4% for the fourth million, and 2% for each additional million. When engaging a brokerage firm for the selling of your business or property, be sure to inquire if they use the Lehman or Double Lehman Scale, before you agree to do any business with them. You can also use the internet to research specific brokerage firms and ascertain whether their claims are borne out in practice.

As a general practice, a business broker will not normally charge an upfront fee. Meanwhile, an M&A brokerage firm is guaranteed to do so. This is due to a variety of factors. For one, a business broker is operating more or less on his own, engaging in buying and selling deals on a freelance basis, in a fashion very similar to that of the average real estate agent. However, in contrast to the business broker’s lone wolf approach, an M&A brokerage firm will immediately place a hired team of writers, analysts, and deal making professionals on the case. Not only that, but they must also deal with the logistics of implementing and then conducting the progress of what amounts to a marketing campaign on behalf of your business or property.

In short, a business broker and an M&A firm are two very different animals. It will be up to you to make the right choice as to which you will employ.

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