One reason small business owners might hesitate to move forward with the sale of their business is because they are unsure about all the costs that they will incur. After all, what you get to keep is more important than the actual Purchase Price. Here’s a breakdown of the expenses that you can expect:
You’ll pay fees to professionals who will be key to a successful transaction:
Accounting & Finance
Some owners pay for a professional valuation before listing their company, especially if the sale involves a partner or family member. A third-party valuation helps everyone agree on fair pricing and avoid disputes (brokers often provide an opinion of value as part of their service). You’ll want to keep your CPA close to you throughout the transaction and get advice on your potential tax liability and discuss ways to mitigate its impact. Accountants charge varying fees for such services and some may refer you to outside services for tax mitigation strategies like specialized trusts. You may also get such advice from your Wealth Manager if you have one. Some Sellers also choose to get a QoE Report upfront to better position the company for a sale. A Quality of Earnings (QoE) Report is a deep-dive analysis performed by an outside firm to verify the sustainability and accuracy of a company’s reported earnings and cash flow. These reports can cost anywhere from $15,000 to over $50,000, depending on the size and scope of the business. Your advisor can review your financials and recommend whether such a report is necessary or if you can skip it altogether.
Legal
The complexity of the transaction and the level of cooperation from the other party will determine the need for a good M&A Attorney and the scope of their work. A small transaction that is relatively simple could have legal fees of less than $5,000, but larger, more complex transactions can go well into the six-figures. It’s hard to know where your fees will land until you know the kind of transaction you’ll be involved in.
Broker or M&A Advisor Fees: Your broker will charge a fee based on a percentage of the sale price.
Your broker’s job is to be the quarterback of the whole process and guide you to a successful sale. That may include starting by providing an Opinion of Value, packaging the business for sale by preparing a Confidential Information Memorandum, conducting proactive outreach and confidential advertising to find the right Buyer. They should then pre-screen the Buyer to filter out the tire-kickers from the serious Buyers that are likely to get a deal done. This process should help save you a lot of time so you can focus on your most important job , which is running the business. An experienced broker will understand your business model and be able to articulate the right message to the Buyers, so they can envision themselves running the business and making any necessary improvements to take the company to the next level. If your business is not ready to go to market yet, they should also be able to give you invaluable advice on improvements that you can make to better position the business for a sale in the future.
Most of the business intermediary’s fees are usually tied to the success fees, which are generally in the 10-12 percent range from smaller main street type businesses to as low as 2% for larger mid-market businesses. It would depend on the size and complexity of the transaction, and the level of risk involved with actually closing the deal. Some will also charge upfront fees for an Opinion of Value ($1k - $5k), or a retainer ($5k - $25k) to get the project started, while others may be willing to take on the job with no upfront fees and only a Success Fee upon selling the business.
By far, the largest expense you’ll pay for selling your business is the tax you’ll pay on what you earn.
That’s why we always recommend that owners begin by sitting down with their CPA, and financial & estate planners. Your team of advisors will help you evaluate your financial position and how much you can expect to earn from the sale of your business. You should have a clear idea of whether it’s adequate to fund your retirement plans and understand the tax implications of the capital gains. If the sale price isn’t enough to meet your needs, you’ll be able to develop a strategy for growing the company and selling later.
There are ways to mitigate the amount of tax you’ll owe, including deferring payments through a Seller-Note, or earnout, rolling equity into the deal, or setting up one of several Trusts that can help defer taxes. Each approach comes with pros and cons and should be carefully weighed along with your advisory team to choose the right option for you. Some Sellers are aggressive in the tax mitigation strategy, and others choose to take the tax hit upfront and move on.
Many Sellers assume they’ll owe 15-20 percent on the total sale price of the business at their respective Capital Gains rate. That is oversimplification since it doesn’t account for State taxes, Net Investment Income Tax, or doesn’t account for the correct Cost Basis in your business. The Structure of the Sale (Asset Sale or Stock Sale) and Allocation of Purchase Price will also make a difference in your final tax liability. Of course, I am not a CPA and am not giving any tax advice here, other than to say it is very important to get your tax advisor in on the discussion early in the process to avoid a last-minute surprise!
Feel free to reach out if you’d like to get more specifics on potential expenses for selling your business, along with an Opinion of Value!
