Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / Why Your Business Broker Fees Are Higher Than You Think
Transcript
- Lucas: Let’s talk about the one line item on every middle-market deal sheet that drives both buyers and sellers to the edge of their seats: the broker commission. It is usually presented as a simple percentage, typically five percent of the enterprise value, but the actual mechanics are where the money gets lost or saved. Luna: Right, because five percent sounds straightforward until you realize it might apply to the full asking price, even if the final sale drops significantly after negotiations. Lucas: Exactly. And that is just the headline number. The real complexity lies in the success-based retainer model, which has become the standard for anything above a five million dollar transaction. A broker will take a monthly fee, say ten thousand dollars, but only keep it if the deal closes within a certain window, usually twelve months. Luna: So if the deal drags on, does the seller keep paying that retainer indefinitely? Lucas: That is the trap. Most mandate agreements have a sunset clause, but it is rarely generous. If the deal stalls at month eight because of financing issues or buyer hesitation, the seller is still writing checks for marketing and due diligence support that isn't leading to a closing. I looked at a case last week involving a regional manufacturing firm in Ohio that got stuck in this exact loop. Luna: What happened to them? Did they fire the broker? Lucas: They renegotiated. They had a ten million dollar asset, and the initial broker was demanding fifteen thousand dollars a month with no cap on total fees. By month nine, they had paid nearly one hundred fifty thousand dollars with zero progress. They brought in a second broker who agreed to a tiered commission structure. Luna: A tiered structure? How does that actually work in practice? Lucas: It’s simple leverage. Instead of a flat five percent on the entire sale price, the broker gets three percent on the first five million, and then six percent on anything above that. This aligns the broker’s incentive to push for a higher valuation rather than just chasing any quick close. It forced them to focus on quality buyers instead of quantity leads. Luna: That makes sense, but doesn’t that discourage brokers from taking smaller, riskier deals? Lucas: It does, which is why you see so many small businesses selling without professional representation. They can’t afford the retainer, and they don’t qualify for the high-tier incentives. But for mid-market deals, that alignment is critical. You want someone whose paycheck grows faster if you get a better price. Luna: I’ve always wondered why buyers don’t pay their own brokers directly instead of splitting the cost with the seller. Lucas: In the lower end of the market, that happens more often. But in middle-market transactions, the dual agency model is deeply entrenched. Both parties often use the same broker, or they split the fee equally between buyer and seller agents. It reduces friction in the initial handshake, but it creates a conflict of interest later on. Luna: Because the broker wants to close the deal, not necessarily protect your best interests. Lucas: Precisely. If the buyer’s agent is also representing the seller, they have no reason to dig too deep into the red flags. They are motivated to keep the pipeline moving. That is why sophisticated buyers bring in separate advisory firms for due diligence, completely bypassing the broker’s internal team. Luna: So the broker’s fee covers marketing, but the real protection comes from independent advisors? Lucas: Yes. And that is a distinction most first-time sellers miss. They think paying the broker covers all the bases. But the broker is a salesperson, not a forensic accountant. When I look at the term sheets from Q3 2026, the average due diligence budget for a ten million dollar deal is around two hundred fifty thousand dollars, almost entirely separate from the broker’s cut. Luna: That is a significant chunk of capital just to verify what the seller claims. Lucas: It is. And often, the broker tries to bundle that cost into their retainer or mark up the vendor recommendations. I saw a case where a broker recommended a specific legal firm for the purchase agreement, and that firm charged double the market rate. It wasn’t illegal, but it was clearly a kickback arrangement disguised as service. Luna: That feels like a breach of fiduciary duty, even if it’s technically allowed. Lucas: It is. And that is why the new generation of M&A advisors are pushing for transparency clauses in their contracts. They disclose all referral fees upfront. It builds trust, but it also scares off the old-school brokers who rely on opaque margins. The market is shifting toward cleaner fee structures, especially with private equity buyers who demand full disclosure before signing a letter of intent. Luna: Do those transparency clauses actually change the final sale price? Lucas: Indirectly, yes. Because they reduce transaction friction. When both sides know exactly what they are paying, they stop arguing over hidden costs during the final negotiation. The Ohio manufacturer I mentioned earlier saved nearly two hundred thousand dollars simply by capping the total advisor fees at seven percent of the sale price, regardless of the duration. Luna: That is a massive saving for a ten million dollar deal. Almost twenty percent of the net proceeds. Lucas: Exactly. And that money stays in the seller’s pocket or goes toward reducing the buyer’s debt load. It changes the dynamics of the final counteroffer. Sellers who understand their fee exposure can be more flexible on price because they aren’t trying to recoup wasted advisory costs. Luna: So the lesson is that fee negotiation is part of the valuation strategy, not just an administrative detail. Lucas: It is absolutely part of the valuation. You cannot value a business in isolation from the cost of transferring it. If the transfer costs eat up thirty percent of the upside, the effective multiple drops significantly. Buyers factor that in. They know that a high-multiple deal might come with heavy integration and advisory costs that dilute the return. Luna: This brings up another question. What about earn-outs? Do broker fees apply to those deferred payments? Lucas: That is one of the most contentious areas in modern M&A. Traditionally, brokers only get paid on cash received at closing. But as earn-outs become more common, especially in tech and services sectors, brokers are demanding a cut of those future payments too. It creates a misalignment. The seller wants to hit the earn-out targets, but the broker might prefer a lower upfront price to secure their immediate commission. Luna: So the broker could lose motivation to help the seller achieve the performance milestones. Lucas: Or worse, they might encourage the seller to accept a lower base price in exchange for a higher earn-out potential, knowing they’ll still get their percentage later. It is a subtle manipulation of risk. Smart sellers negotiate hard limits on earn-out commissions, capping them at half the standard rate or excluding them entirely if the performance is outside the seller’s control. Luna: That seems like a vital clause to include in the initial mandate. You don’t want to fight it six months later. Lucas: You never do. Once the deal is hot, everyone assumes they will win. That is when you sign the worst terms. I advise clients to draft the fee schedule as carefully as the purchase agreement itself. Every variable, every trigger, every sunset date needs to be explicit. Luna: It sounds like the biggest risk isn’t the fee itself, but the lack of clarity around how it scales. Lucas: Clarity is currency in this space. Ambiguity allows fees to creep up. When you lock in a clear, tiered structure with defined triggers, you remove the emotional argument from the table. It becomes a mathematical exercise rather than a battle of wills. Luna: Before we dive deeper into how buyers structure their side of this, I want to pause for a moment. If these conversations have moved your work forward in some small way, consider supporting the network directly. A couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Yeah, it really does make a difference in keeping the research rigorous and the ads off. Thank you for that. Luna: And back to the buyer’s perspective. When a buyer is looking at these fees, do they try to shift the burden onto the seller? Lucas: They absolutely do. It is very common for buyers to ask sellers to cover the buyer’s broker fees as a condition of the sale. In a weak market, sellers often agree because they need the liquidity. But in a competitive auction scenario, buyers are expected to bear their own costs. Luna: So the power dynamic dictates who pays the tab? Lucas: Exactly. If you have three buyers bidding for your business, they will absorb their own broker fees to show financial seriousness. If you have one interested buyer, they might try to offload the cost. It is a signal of confidence. Paying your own way says you are committed to the deal. Luna: That is a useful heuristic for sellers to gauge buyer commitment early on. Lucas: It is. And it ties back to the quality of the buyer. Buyers who are unwilling to invest in proper representation often turn out to be flaky or undercapitalized. The fee structure acts as a filter for seriousness. Luna: So ultimately, the broker’s fee is less about the percentage and more about the alignment of incentives and the clarity of the contract. Lucas: Without a doubt. The best deals aren’t the ones with the lowest fees; they are the ones where the fees match the effort and the outcome. If you are structuring an exit or an acquisition this quarter, start with the fee schedule. It sets the tone for everything that follows. Luna: Does that mean we should see more standardized fee templates emerging across the industry soon? Lucas: We already are seeing associations push for standardization, but individual mandates will always vary. The trend is toward more transparency, though. As data becomes more accessible, opaque pricing becomes a liability rather than an advantage. Luna: Interesting. So the next time you see a five-percent quote, you’ll be looking for the fine print on sunsets and tiers. Lucas: Always. The fine print is where the real value lives, or dies. Luna: One last thought on this. If the broker’s role is becoming more transparent, do you think their influence on the final valuation will diminish over the next few years? Lucas: I think their role will shift from gatekeeper to facilitator. They won’t control the narrative as much, but they will still be essential for navigating the complex web of regulatory and financial requirements. The value moves from information asymmetry to execution efficiency. Luna: Execution efficiency. That is a good phrase to remember. Lucas: It is. And in a market this quarter where speed matters as much as price, that efficiency is worth every penny of the fee.