As an entrepreneur, selling your business is one of the major life decisions you’re going to make.
It’s also probably one of the more expensive decisions.
I came to the decision to sell my business, not because I needed to cash out, but because I didn’t want to run a business any longer. I was tired of being the president and was ready to try something different in my life.
What I hadn’t realized prior to starting the M&A process was not only how difficult it would be to sell my business, but moreover, how expensive it would be.
So let’s dive in, and I’ll share some of how much it costs to sell your business.
How Much Does it Cost to Sell Your Business?
When I met with my first investment advisor four years prior to the business sale, I was quite dismayed to find how unprepared I was for an eventual sale. Not only did I not have my personal affairs in order (family trust and tax planning), but I was completely overwhelmed with the list of items that needed to be ready when I decided to pull the trigger.
The list was an Excel document with 140 line items.
140 line items! That’s how many things the M&A advisor needed to see and the business needed to have in order, prior to even going to market.
I glanced at the list, made a mental note of some of the top things that needed to be done, and got to work.
It took me four years to organize the business and get things prepared enough so a buyer would be willing to consider the business.
Are You Prepared to Sell Your Business?
Many business owners are ill-prepared to bring their business to market and only begin the process of getting their business ready after it’s too late.
What do I mean by too late?
In the blog post titled “6 Things You Need to Do Now If You Want to Sell Your Business“, I wrote the following:
If you want to set your business up for an eventual sale, you need:
- growth (an upward trajectory of earnings)
- a decent level of profitability (north of 12% EBITDA to revenue)
- a business with a large percentage of recurring revenue
- a strong management team in place
- clean income and cash flow statement and balance sheet
- a well-run organization with advanced ERP and technology
Give yourself 1 point for each of the above you already have. If you’re hoping to sell your business in a few months and have just come to realize that you scored a 3 of 6 in the above mini-test, then good luck with the sale.
Not All Businesses Are Created Equal
One small, or potentially really large caveat to the point about your business producing 12% EBITDA to revenue margins is that not all businesses are created equal, of course. I’ve seen situations where a business is actually losing money, and still receives many multiples of revenue as a valuation. Here’s what I wrote in another blog post titled: How to Expand Your Business Through Acquisition and Make a Killing
I spoke with a CEO friend who recently sold his business for 11×REVENUE. Not EBITDA, but revenue. His business was a rapidly growing SaaS business.
One of the more important points from the above list is having a strong management team in place. If you’re the primary sales, marketing, accounting, and operations person in your business and you haven’t built a team to help you, then how can you expect a buyer to transition your business successfully when you sell your business and walk away?
And therein lies one of the main barriers with respect to salability. Owner overinvolvement. The smaller your business, the more the owner is involved in the business, and the more difficult it will be to sell. This is often the case for small business owners with less than $5 million in revenues.
Conversely, the larger the business, especially once you scale past $5 million in revenues with a proper management team in place, the easier it is to sell your business. And once you’ve reached that stage, the next question is how much it will cost you to sell your business.
Selling Your Business? What’s the Next Step?
The scope and complexity of work involved to sell a business, whether your business has revenues of $5 million or $50 million, is often the same. If anything, it’s often easier for a broker (or M&A advisor) to sell a larger business than a smaller business. So the higher up the revenue ladder you scale, the higher the EBITDA valuation you’ll receive and the lower the percentage the M&A advisory fees are with respect to the total sales price.
Picking the right advisor is crucial though, so it’s important that you get this part right. You need to make sure the advisor has sold businesses of your size and type before. If your business is in Toronto and your advisor is in Chicago and doesn’t know the local landscape for your local elevator repair business, then that could be a problem. Similarly, if your advisor typically works on smaller engagements and your business is the largest sale they’ve ever handled, that could also be a problem.
M&A advisor fit is crucial. Getting this right is often the difference between a successful business sale and no sale.
And with regards to fees, according to Brent Beshore from Axial, a firm that helps mid-market companies find the right buyers and investors, the usual range for M&A advisory fees is typically from as low as 3% to as high as 15% of the sale price with a minimum spend of $25,000. According to Brent, “That’s a wide range and necessarily so based on the levels of complexity, size of the transaction, industry dynamics, and buyer choice. Generally, the larger the transaction, the higher the numerical cost, but the lower the fees as a percentage of the transaction.”
Negotiations in Selling Your Small Business
Keep in mind that this is a business transaction between two parties, and as with any transaction, there’s always room for negotiation. In my deal, E&Y had asked for a five-figure monthly “work fee” that would be refundable on a successful sale. Not only did I negotiate this fee, but I also negotiated the percentage amount down from their original ask.
Pay particular attention to the details of the contract (proposal) though, because some of the fees can be somewhat confusing, especially if you haven’t worked with an M&A advisor in the past. These fees often require you to pay the full value of all consideration including cash, debt, equity rolled over, seller note, and earnout. Make sure you understand the subtleties. The fine print did, unfortunately, catch me by surprise.
The percentage amount the broker will ask for will vary of course, based on the timing, market, competitive nature of the M&A field at the time, and many other factors, but the most important will invariably be the size of the transaction. If your business is worth $5 million, you can expect to pay upwards of 8 to 12%, and likewise, if your business has a $50 million value, the fee could go as low at 1.5%.
Legal and Accounting Fees in Selling Your Small Business
What I’ve covered above are the M&A fees associated with selling your business. Next, and of equal importance, are the legal and accounting fees. For those, you’re typically looking at a minimum of $10,000 for legal, and slightly less for accounting, BUT, those fees can climb quickly the larger and the more complex the deal. I’ve seen situations where legal fees can climb into the hundreds of thousands of dollars for a business in the $30 million dollar range, and in fact, it’s quite possible that the accounting and legal fees can be even more expensive than the M&A brokerage fees. You can read more about the importance of an accountant and lawyer in this blog post: How Important is The Lawyer and Accountant to The Small Business?
This could possibly be the largest transaction of your lifetime, so do your homework, get your business prepared (if possible, many years in advance), shop around for a suitable M&A advisor, and go kick ass. Hopefully the above provided some guidance on how much does it cost to sell your business.
Good luck in selling your small business
If you liked this post, you might also like this one: How Do You Know When It’s Time to Sell Your Business? It’s Not All About the Money.
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Also, I published a book during the summer of 2018, “The Kickass Entrepreneur’s Guide to Investing, Three Simple Steps to Create Massive Wealth with Your Business’s Profits.” It was number 1 on Amazon in both the business and non-fiction sections. You can get a free copy here.