The Cost of Selling A Business in Palm Beach County
Selling a business is not without costs, but most costs (including the commission) are not incurred until and unless the business actually sells. The average commission cost is about ten percent for the sale of small businesses, and in many cases may be the only actual cost incurred by the seller. Other costs born by the seller may include expenses paid to their landlord, attorney, and accountant. Such transactional costs should only be incurred until and unless the buyer and the seller obtain a meeting of the minds on the basic deal structure.
Cost of Broker’s Commission When Selling Your Business
- No reputable business broker should charge any up front fees when selling a business.
- A professional business broker understands the necessity of working strictly on commission.
- In exchange for the seller abiding by the terms of the listing agreement, a professional business broker agrees to only get paid if the business sells.
- This allows the seller to avoid any up front costs and devote their time and resources into running their business.
- Business broker commission rates are higher than residential or commercial realtor rates because of the increased costs and time involved in confidentially procuring a qualified business buyer.
- Also, a business broker has the experience and expertise associated with business sales and transactions that traditional realtors do not have.
Attorney Costs Vary
Some business owners do not use an attorney at all when selling their business. For cash deals (with no seller financing), it is fairly common for sellers not to use an attorney since the seller has little risk of not getting paid in full. The seller should still understand that an attorney may be necessary to help negotiate and understand the purchase agreement. Other sellers may have a family friend who is an attorney and may seek their ‘free’ advice. For business owners who do choose to hire an attorney, the costs vary with the amount of work required.
Find Right Attorney
Business owners who do choose to hire an attorney should do their own due diligence and find an attorney familiar with or specializing in business transactions. Of course, the attorney’s hourly rate (or flat fee) should be within the seller’s comfort zone. An overlooked aspect of hiring a business attorney is finding one with the sufficient time to promptly work on the deal. Delays caused by attorneys may cause serious harm to the deal and cause ill-will for either side.
Complex Deals Mean Higher Attorney Costs
The actual attorney costs depend on what the seller wants their attorney to do. Normally, sellers who use attorneys have them negotiate the purchase agreement (the buyer typically proposes the purchase agreement) and handle the closing. Legal costs increase the more complex the deal and the more complex the purchase contract. Specifically, seller-financed transactions (where the seller hold back some of the purchase price via a Note from the buyer) are more complex and involve more risk for the seller. That will definitely lead to higher legal costs.
Accounting Costs Incurred By Seller When Selling Business
- Most sellers use an accountant who do their taxes and compile quarterly or annual profit and loss statements for the business.
- During the course of formal due diligence, many sellers end up paying their accountant extra fees in order to do extra work.
- Such extra fees usually include generating more detailed financial statements, locating historical financial documents, and answering questions communicated by the buyer or by the buyer’s accountant.
- A good preparatory step before selling a business is avoiding many of these costs by having clear and concise accounting records.
Seller Should Wait Before Incurring Costs
The role of an attorney or an accountant in a business deal generally should be very limited until and unless the seller and the buyer have a meeting of the minds as to the purchase price and basic framework of a deal. The general rule of thumb is that neither an attorney nor an accountant is needed until after a Letter of Intent (LOI) is signed. At that point, the seller will know that there is a serious and qualified buyer in place who has signed a written document containing the salient points of the deal. There is typically no need to incur pointless costs on an attorney or an accountant until this occurs.
Paying the Landlord An Assignment Fee
- Some commercial leases contain various assignment fee clauses whereby the current tenant (or seller of the business) pays the landlord a ‘transfer’ or ‘assignment’ fee in order to transfer the lease to the new tenant (or the buyer of the business).
- Sometimes such an ‘assignment fee’ may be unreasonably high and should be negotiated down.
- The cost is normally a maximum of one month worth of rent (typically it is less than this amount).
- Sellers should examine their leases well before the selling process begins and take note of any assignment fee.
Costs of Taxes
The tax consequences of selling a business has many moving parts and should certainly be addressed with an accountant. Capital gains taxes may be owed by the seller after the sale. The long term capital gains tax rate is generally 20 percent of the purchase price (minus the taxable ‘cost basis’ of the business). State sales taxes may also be owed if there is a substantial amount of inventory associated with the sale, but this is rare and can generally be avoided. For larger and more complex transactions, the deal structure and allocation of the purchase price is a negotiable issue where the buyer and seller’s desires may conflict.
Closing Costs
Unlike real estate sales, business sales are not reported to any governmental agency. Documentary stamp taxes are not owed unless there is a qualifying Seller’s Note involved in the deal. No property taxes or title insurance costs are owed unless real estate is involved. Attorneys generally charge as much as $5,000 to conduct a business closing (including drafting a closing statement). Other closing agents charge less and some business brokers include the performance of the closing in their commission. Such closing costs generally are split between the parties or are a matter (like everything else!) for negotiation.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business and to discuss the costs of selling your specific business.