Broker listing agreement fees: what's normal and what isn't.

None of the fees below is a scandal. They are how the commission model works, and a good broker earns theirs. The problem is that most owners see a listing agreement once in their life, sign it in an afternoon, and learn what the clauses meant a year later. This is the version we wish every owner had read first. The percentages themselves, with the Chicago market next to our column and the fee worked out at each sale price, are on business broker fees in Chicago; this article is about the agreement those percentages sit in.

The success fee

The main event. For main-street and lower-middle-market businesses in Chicago, the success fee runs roughly 8 to 12 percent of the sale price, paid at closing out of the proceeds. Ten percent is the number you will hear most often. On a $1.5 million sale that is $150,000, and a two-point difference either way is $30,000, which sounds like a lot until you compare it with what an unprepared set of books costs in diligence, which is routinely a multiple of that.

The fee usually applies to total consideration, not just the cash wired at closing. Ask whether seller notes and earn-outs are included, because they often are, and ask when the fee on an earn-out comes due.

Lehman and Double Lehman, briefly

Above roughly $2 million in sale price, a flat percentage starts to look expensive, and firms switch to a sliding scale. The original Lehman formula pays 5 percent of the first million of sale price, 4 percent of the second, 3 percent of the third, 2 percent of the fourth, and 1 percent of everything after. Most brokers who use a scale today use Double Lehman, which is the same shape at twice the rates: 10 percent of the first million, 8 of the second, 6 of the third, 4 of the fourth, 2 thereafter.

The arithmetic matters more than the name. On a $3 million sale, Double Lehman pays $240,000, an effective 8 percent. On $5 million it pays $300,000, or 6 percent. Some firms modify the scale so the rate steps down more slowly, or apply it to enterprise value rather than the cash price. Ask which scale, applied to what number, and have them show you the fee at your expected price and at 20 percent below it.

Retainers, minimums and the quiet fees

Minimum fees. A 10 percent commission with a $25,000 minimum is not 10 percent on a $180,000 business; it is 14 percent. Minimums commonly run $10,000 to $25,000 in this market, and they matter most exactly where owners can least afford them. On the deal sizes we serve, $1 million to $15 million in revenue, a minimum rarely bites, but check.

Upfront and monthly charges. Some firms charge a valuation or "packaging" fee before listing, anywhere from $2,000 to $25,000, and some charge a monthly marketing retainer while the business is on the market. Neither is inherently wrong. What is wrong is discovering after the fact that they were non-refundable if the business never sold. Ask what happens to every dollar paid before closing if there is no closing.

Early termination and withdrawal. A few agreements charge you to change your mind, or convert the full commission into a debt if you withdraw after an offer arrives at the listed price, even an offer you would never accept in practice. Read that clause twice.

The tail. For 12 to 24 months after your agreement ends, the broker is still owed the full commission on any buyer they introduced. That is fair in principle; nobody should be able to wait out a broker and then sell to the buyer the broker found. It stops being fair when there is no written list of who was introduced, or when the tail covers buyers you already knew by name.

How an M&A advisor charges differently

On larger deals, typically above the main-street band, the firm may call itself an M&A advisor or an investment bank, and the fee structure changes shape. The common pattern is a monthly retainer, sometimes credited against the success fee and sometimes not, plus a success fee on a sliding scale such as Lehman or Double Lehman. The retainer is meant to cover the months of preparation and marketing before any buyer is at the table. It also means you are paying whether or not the business sells, so ask what the retainer buys and when it stops.

The trade-off is real. A retainer removes some of the pressure to close fast at any price, because the firm is being paid to do the work rather than only to finish it. A pure success fee removes the risk of paying for nothing. Neither is right for every owner. What is never right is a structure you didn't understand when you signed.

Five questions to ask before you sign

1. How long is the exclusivity period, and what ends it? Ask how long it runs, what happens if the business hasn't sold by then, whether it renews automatically, and what notice you have to give to end it.
2. How long is the tail, and who is on the list? Get the tail period in writing and ask for a buyer registry: the written list of every party the broker introduced, delivered when the agreement ends. Carve out, by name, anyone you already know.
3. Is there a minimum fee, and what is the fee at my price and at 20 percent below it? Have them write the two numbers down. A scale that looks reasonable at your hoped-for price can look very different at the price you actually get.
4. Who pays for marketing, and what happens to that money if the business doesn't sell? "Non-refundable" should be said out loud before you sign, not discovered after.
5. What if I find the buyer? A competitor calls you directly, a key employee makes an offer, a customer wants to buy. Some agreements pay the broker the full fee regardless, some pay a reduced fee, some exclude named parties. Decide this before you sign, not after the call comes in.

What we charge

Our terms, stated plainly. When we list and sell a business, the fee is 10 percent of the sale price, paid at closing out of the proceeds, and it goes in the listing agreement before we go to market. There is no retainer and no monthly fee while the business is listed. If it doesn't sell, you don't owe a success fee.

Preparation is separate and flat. The Exit-Readiness Review is $4,500 for two weeks of work, and the $4,500 is credited against the success fee if we later sell the business. The Sale-Ready Program runs from $2,500 a month for owners a year or more out. Both fees are in writing before the work starts, and neither depends on a listing, which is the point: nothing pushes us to take a company to market before it is ready.

And when Lakeshore is the buyer, there is no fee at all. If we want to buy the business ourselves, we say so in writing before any listing work begins, and you stay free to go to market instead.

The cheapest fee is rarely the right question

Judge the whole number: what you keep after the fee, the price, and the taxes. A broker who charges two points less and takes an unprepared business to market can cost you far more than the two points in retrades and holdbacks. The seven things a buyer's accountant finds first is the list of where that money goes, and what Chicagoland businesses actually sell for is where it comes from. The number the fee applies to is the subject of how much is my business worth. If you're comparing firms, how we run a sale shows what the 10 percent buys, step by step, and selling a business in Chicago puts the whole calendar, Illinois closing notices included, on one page.