When buying a small business, it’s not always clear what fees the buyer is responsible for and who’s even involved.
When I first got started in this space, I remember being unclear about how brokers were paid:
Were they compensated like real estate agents?
If there was a buy-side advisor and a sell-side advisor, did they split the fees?
It turns out, business acquisitions are much different than real estate. Although in real estate, the buy-side agent represents the buyer and vice versa for the sell-side agent, in business acquisitions, rarely is there a buy-side advisor.
I even recall brokering a deal a couple of years ago where a buyer came in with a buy-side advisor. That situation nearly cost the buyer the deal because there was an expectation that I, as the sell-side broker, would share the fees I earned from the seller. While that wasn’t something I was willing to do in that instance, many brokers are open to it.
But how do you navigate these scenarios?
In this week’s article, I’m going to explain what parties are normally involved in the acquisition process, what fees are associated, and who pays the fees, so you can navigate the process with clarity and confidence.
Understanding Transaction Fees
Business transaction fees for brokers, M&A advisors, and investment bankers are generally based on a percentage of the transaction amount, but it’s not always a flat percentage. A sliding scale is applied based on the size of the deal, the most common sliding scale for deals under $100 million being the “Lehman Formula.”
The original Lehman Formula follows a 5-4-3-2-1 ladder, like so:
- 5% of the first $1 million involved in the transaction
- 4% of the second $1 million
- 3% of the third $1 million
- 2% of the fourth $1 million
- 1% of everything thereafter (above $4 million)
So for example, if the purchase price of a listing is $5 million, if we were to follow the original Lehman Formula, this is how the commission would be charged:
Source: Venture First
Adding up the different tiers, the total commission on a $5 million deal would be $150,000.
However, keeping up with inflation, the more common variation of the Lehman Formula that’s now used is a multiple of the original 5-4-3-2-1 ladder, such as the double Lehman Formula (10-8-6-4-2). This structure is found more in middle market transactions since these deals tend to have a longer process and are more complex than main street businesses.
In the higher market segment ($50 to $100 million range), the effective fees blend to around 2% to 3%, making the Lehman Formula less impactful for smaller transactions. Middle-market firms often simplify their fee structures for larger deals, but this formula remains the foundational anchor.
For smaller deals, such as those under $5 million, the Lehman Formula still serves as a guideline, but the percentages and structures may be adjusted. For example, modern adaptations of the Lehman Formula often increase the percentages for smaller deals to reflect the higher effort relative to the transaction size.
Who Pays the Fees?
Now, without a clear distinction between the buy-side and sell-side brokers, who pays the fees?
In almost all cases, the seller engages and pays the intermediary – whether the intermediary is a broker, M&A advisor, or investment banker.
The reason why is because the intermediary’s primary responsibility is to represent the seller. While intermediaries aim to get deals done, which requires aligning both the buyer and the seller, their incentives are ultimately aligned with the seller.
As a buyer, while you might work closely with a broker and feel they’re aligned with your interests, it’s important to remember that their primary obligation is to the seller – and their goal is to secure the highest possible price.
That said, let’s explore an important nuance.
Like real estate agents, advisors are incentivized to close deals rather than hold out for a marginally higher price. For instance, if a deal can close at $1.5 million instead of risking failure by pushing for $1.6 million, most advisors will favor the lower price to ensure the deal goes through.
Why? Because the additional commission on that extra $100,000 is often negligible – perhaps $1,000 to $3,000 – especially when split among the advisor, their firm, and others involved. And most importantly, a commission on a $1.5 million deal is infinitely better than the commission on no deal (zero).
This is why even though brokers may seem like they would drive up the asking price, they understand that they can only do so within the fair market value range. Typically their valuations will fall within this range to ensure that it’s a number both the buyer and seller will agree to.
That said, these fees remain the seller’s responsibility. The advisor charges the seller for their services, raising the question: What does the buyer pay?
What Buyers Should Expect to Pay
If the seller is the one who engages and pays the intermediary (from the proceeds they make during the sale of the business), what does the buyer pay for?
Outside of paying for the business itself and any due diligence, legal, and accounting fees associated with the process, a buyer may pay for an optional buy-side advisor. However, unlike the way it sounds, a buy-side advisor’s primary role is to act as a deal “bloodhound.” Typically, their fees include a $5,000 monthly retainer – though this may have increased recently due to inflation – and a success fee structured similarly to a “double Lehman” formula.
Fees for a buy-side advisor are 100% the buyer’s responsibility.
The primary function of a buy-side advisor is to source off-market deals because those aren’t already represented by a seller. The ones that are represented by a seller can be easily searched for by any buyer. That said, proprietary deal sourcing can be unpredictable, as it operates in a “wild west” environment with no standardized processes.
Source: CC Capital Advisors
Relationship Between Buy-Side Advisor and Sell-Side Broker
Although a buy-side advisor may approach the sell-side broker in a listed deal to negotiate fee sharing, such as splitting commissions or arranging a referral fee, this isn’t guaranteed and depends on the circumstances.
This would likely occur in thin markets, such as niche or geographically concentrated businesses; in situations where sell-side brokers have difficulty sourcing buyers, they would be more willing to collaborate with buy-side advisors.
For example, consider a business providing cubicle setups in Kansas City, with a localized customer base and modest EBITDA. A business like this may struggle to attract private equity or institutional buyers, which leaves the broker with a limited pool of potential buyers. In these cases, the broker might be open to sharing fees to find a buyer and close the deal.
However, ultimately, it is the sell-side broker’s decision whether or not he or she is open to sharing fees with buy-side brokers. If a broker already has a wide pool of buyers to get a deal done or it’s a deal that’s in high-demand, there’s a good chance the broker will refuse to work with a buy-side broker, because they would be splitting their earnings with someone for no good reason.
Speaking for myself personally, working as a broker at QuietLight, I spent a lot of time early on putting in the groundwork to actively engage with buyers.
I traveled to conferences, spoke on stage, and wrote a book, all of which allowed me to build a vast community of tens of thousands of active buyers. When QuietLight brings a deal to market, we typically generate multiple offers – often two, three, or four – because of the foundational work we’ve put into building relationships and creating a strong buyer ecosystem.
As a result, when a buy-side advisor approaches me asking for a piece of my fee, I politely decline because I already have access to a large buyer pool, and the buy-side advisor isn’t providing me with anything I don’t already have.
This brings us to an important point: if a sell-side broker is unwilling to share fees, the buyer becomes solely responsible for paying their buy-side advisor. This means that if you, as a buyer, hire a buy-side advisor to help you source deals, their fees fall back on you, and you need to account for them in your overall transaction costs.
Remember, a buy-side advisor’s primary role is deal sourcing, not representation. Because a sell-side broker can and does actively manage the entire acquisition process without the help of a buy-side broker, adding a buy-side broker would create a redundant and costly fee without significant added value.
When Does Everyone Get Paid?
Now that we’ve established who gets paid and who pays for what, when do all parties get paid?
Firstly, no one (but the attorneys) gets paid until the buyer closes the deal, and everyone gets paid when the deal closes. This occurs when the final closing documents are signed by all parties and the buyer and seller begin to transfer assets (unless a closing date is set for the future – see below).
Source: Morgan & Westfield
The seller receives their exit proceeds when they’re released from escrow, after the deal has closed.
The broker earns their success fee when the deal closes, which is agreed upon before the listing goes to market.
The banker gets paid when financing is arranged and the deal closes.
Both the buyer’s and seller’s attorneys get paid, regardless of whether the deal closes. They may arrange to have the payment transact before engaging the client. This same treatment would apply to other people you hire throughout the acquisition process, such as a due diligence firm or accountant.
In case you missed the fine print in the last paragraph, unlike brokers and bankers, attorneys are not incentivized to close deals. Their role is to protect their client’s interests, which can sometimes introduce undercurrents that slow or complicate the process.
The reality is that some attorneys are excellent at balancing protection with deal facilitation, while others may unintentionally create barriers.
Who Represents the Buyer?
This leaves an important question: Who is truly advocating for the buyer?
In most transactions, the answer is no one.
While everyone is incentivized to get the deal done, their primary loyalties lie elsewhere. Even due diligence companies, while helpful, are not there to negotiate terms or represent the buyer – they simply report findings. Only if you hire a buy-side advisor would you have representation in a deal, but again, this is something you’d pay for out of pocket and is not always necessary depending on your existing knowledge of the acquisition process.
Either way, it’s important to understand the nuance differences when you’re buying a business to ensure you have the right support system in place to advocate for your interests throughout the process.
Navigating Fees in Small Business Transactions
Understanding the fees, roles, and responsibilities in a business acquisition is important to navigating the process effectively. Unlike real estate, where buy-side and sell-side agents split fees, business acquisitions often operate under different norms. The seller typically pays for the sell-side broker, while the buyer bears the cost of any buy-side advisor they engage.
As a buyer, you must also understand that no one is inherently advocating for your interests. To protect your interests, ensure you:
- Avoid unnecessary fees by assessing the value a buy-side advisor brings to a specific deal.
- Account for all costs in your acquisition budget, including intermediary fees, due diligence, and legal expenses.
- Set realistic expectations for post-acquisition growth, prioritizing stabilization over immediate operational changes.
By understanding these nuances and proactively assembling the right support system, you can approach business acquisitions with clarity, confidence, and a better chance of long-term success.
Ready to acquire a business in the next 12 months? The Acquisition Lab is your first stop. Reach out to us today and get on the fast track to becoming an acquisition entrepreneur.
