How Much Will It Cost To Sell My Business?

We get the same question from every prospective client, 'how much will it cost to sell my business?'. The question is not surprising given the sale of your company is typically a once in a lifetime event.  It stands to reason; you will want to understand your financial commitment before you undertake such a big step.

This article explains the costs involved in selling your business—including what you’ll have to pay the investment banker and the other parties that are necessary for a successful sale. We provide a range of estimates here; the size and complexity of the transaction will determine where your company lands in that range.

When you sell a business, you will need three key professional advisors to help you with the process:

• Investment banker
• Attorney
• Accountant

We’ll describe how each professional charges and the expected costs to you.

The Role of the Investment Banker in Your Sale

The investment banker oversees the M&A process and is responsible for preparing a preliminary valuation, marketing your company, negotiating the transaction, overseeing due diligence, and negotiating the definitive agreements. Most investment bankers prefer to receive the bulk of their compensation when the deal closes; this helps align the goals of the seller and the investment banker.

Advisory Fees and Their Purpose

Many investment banks, including PCE, will charge the client a monthly advisory fee. We do this for two key reasons:

• To ensure that you are committed to the sale
• To offset a small portion of the costs we will incur prior to closing

A successful sale requires 100% commitment to the process. Periodic advisory fees demonstrate that you are seriously considering a sale versus taking a more opportunistic approach. In taking on just five to eight clients during a typical year, an investment banker must be selective about whom to represent. By paying the advisory fees, you indicate that we are committed to the same ultimate goal: selling your business.

Advisory fees typically run between $40,000 and $100,000. As mentioned above, where you fall within this range depends on the size and complexity of the transaction; smaller or less complex transactions tend to be at the lower end, while larger and more complex transactions will require a larger advisory fee. There is an initial payment when the engagement letter is signed, and the balance of the advisory fee is paid over several months. The investment bank does not want to put a strain on your cash flow; making the payments over several months helps with this.

Depending on the size of the transaction, the advisory fee may (for larger transactions) or may not (for smaller transactions) be credited against the success fee.

Success Fees and Their Calculations

Success fees are the primary source of an investment bank’s compensation. As the name implies, this fee is paid when your company is successfully sold. A success fee is calculated as a percentage of the total value of the transaction.

There are multiple approaches to determining the success fee. One of the most common formulas is known as the Lehman Method, named after the now-defunct investment bank Lehman Brothers. The Lehman Method is a declining percentage over several breakpoints that usually follows the structure outlined below:

• • • 5% of the first $X million
    • 4% of the next $X million
    • 3% of the next $X million
    • 2% of the next $X million
    • 1% of the remaining purchase price

When using the Lehman Method, however, the investment bank receives smaller incremental fees as the price increases. So this structure creates less incentive for the investment banker to push harder to get you a higher purchase price, a factor that could contribute to why your business won’t sell.

Another common method is to charge a flat percentage up to a certain value (the “breakpoint”) and a higher percentage above this value. Using this method, the seller and the investment banker work together to determine a fair value in setting the breakpoint. PCE prefers to use this formula because it creates greater alignment between us and the seller. This structure creates a bonus incentive to exceed the breakpoint. Both parties gain—it’s a win-win.  

With this alternative method, percentages range from 2% to 5% up to the breakpoint, and between 5% and 7% when the breakpoint has been exceeded. Smaller, less complex transactions tend to be at the lower end of the percentage range, while larger, more complex transactions will be at the higher end. Furthermore, investment banks often set a minimum fee—the least amount the firm is willing to be paid for this transaction.

Beyond the retainer and the success fee, the only other costs to the investment bank are out-of-pocket expenses, such as travel costs or other expenses directly incurred by the firm. This typically does not include basic administrative costs such as printing, copying, and telephone charges. Investment banks like PCE also have access to an electronic data room, which is a valuable tool during the sale process. Some investment banks will pass along the cost to the clients, while others absorb this expense.

The Role of the Attorney: What to Expect

Hiring an attorney with a strong M&A background is critical to the success of the transaction. An experienced M&A attorney understands the key deal points and will negotiate an agreement that provides the proper protections to the seller. They can also help you assess when the timing is right to sell your business, ensuring both personal and business needs align with market conditions. You can expect to pay more for an experienced M&A attorney compared to a standard business lawyer, but the increase in cost is well worth the benefits received.

Hourly Rates vs. Flat Fees for Attorneys

The hourly rate for M&A attorneys varies by firm and location. A midsize regional firm or boutique corporate firm should be able to provide the same level of service and expertise as some of the largest law firms in the country, at a fraction of the price. Hourly rates for an M&A attorney range between $500 and $800 per hour for a partner, with associate rates significantly lower. Again, depending on the size and complexity of the transaction, total legal fees should be between $100,000 and $500,000.

An alternative structure for attorney payment is a flat fee, typically beginning at $30,000 and going up from there for the larger, more complex transactions. When a flat fee structure is used, the fee is paid up front and is not contingent on the deal closing or on a certain number of hours involved. While the total fee might be lower, the client is assuming some risk because the whole fee is paid up front, whether or not the sale is successful.

As the seller, you should choose a firm that can provide a full range of services beyond just M&A work. At a minimum, you will need tax structuring and ERISA advice; depending on the kind of company you own, real estate and environmental experience may also be important. While this may seem costly, an experienced law firm will negotiate significant protections in the definitive agreements—a valuable insurance policy after the transaction closes.

Understanding the Role of the Accountant

The cost of using an accountant during the sale of your company will largely depend on how you are using your accountant today. The buyer will conduct a quality of earnings review during the due diligence process, which determines whether the company’s earnings conform with Generally Accepted Accounting Practices (GAAP) and aligns with how a buyer values your business. A higher level of review by your accountant today will make this process less costly and burdensome for you.

Some sellers preempt the buyer’s quality of earnings review and conduct their own. This review helps identify potential accounting issues before the sale, which is always valuable. The cost for a quality of earnings review ranges from $25,000 to $75,000.

If your financial statements are audited going back three years, there will be some expense, but most of this will be tax advisory work. The additional expense today will save you money during the sale; it also will limit issues with the process and make due diligence much simpler. Reviewed financial statements are also helpful, but this will involve a higher level of scrutiny during the due diligence process. Preparing financial statement projections in advance can help reduce scrutiny and streamline the process.

One other factor to consider is how much your company relies on your accounting firm on a monthly basis. The less you rely on the accounting firm on a monthly basis, the lower your costs during the sale process. Your company will not need to rely on your accounting firm if you have a good CFO or Controller who can help you through this process.

Accounting Costs and Their Impact on the Sale Process

Accountant fees start at $10,000 and could be as high as $75,000. At the lower end of the range, you will have audited statements with little to no reliance on the accountant on a monthly basis; you will be using your accountant for tax advice. The buyer will want to speak with your accountant when conducting the quality of earnings review. The more you use your accountant on a monthly basis, and the lower the level of your financial statements, the higher your cost during the sale process. Having a strong CFO or controller in place will diminish potential accounting expenses during a sale.

Why Having the Right Team Matters

During the sale process, you may need to hire other professionals or incur various other transaction expenses specific to your company or industry. But an investment banker, an attorney, and an accountant are the three key advisors you will need. The benefit you will receive in using their services should far exceed the cost, helping you stay focused and manage stress during the sale process.

When selling your business, be sure to monitor your costs so you can maximize the proceeds—but the least expensive option will not always provide the best result. With the right team in place, you will see an increase in value, keep more of your money after taxes, and receive protections that help you retain that value into the future.

Take the Next Step Toward a Successful Business Sale

Selling your business is a once-in-a-lifetime decision, and understanding the costs involved is crucial to a successful transaction.

From advisory fees to legal and accounting expenses, the investment in the right team can significantly impact the outcome of your sale. Our M&A experts are here to help you navigate these costs, maximize the value of your business, and plan an exit strategy tailored to your goals.

Start the process with clarity and confidence. Complete the form below to schedule your free consultation, or contact us directly to speak with our team.