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Business brokers typically charge 8-12% commission on SME sales, with rates varying based on transaction size and complexity. Smaller deals under $1 million often incur flat fees of 10% or higher, whilst larger transactions may employ tiered structures like the Lehman Formula, which applies decreasing percentages as deal value increases. Many brokers also require minimum fees ranging from $10,000 to $50,000, with urban markets commanding 25-30% premiums above national averages. Alternative arrangements include hybrid models combining upfront retainers with reduced success-based percentages. Understanding these structures helps sellers anticipate costs and negotiate favourable terms.
Percentage-based commission models form the foundation of sales compensation for small and medium-sized enterprises, offering straightforward structures where salespeople earn a predetermined percentage of each closed deal’s value.
These flat-rate commission plans typically range from 5-8% of total contract value in B2B environments, with SaaS representatives commonly earning 7% on subscription sales. The structure provides consistent earning potential regardless of deal size variations, creating predictable compensation systems for both employers and sales staff.
Most SMEs implement a standard 60:40 compensation split, allocating 60% to base salary and 40% to commission-driven earnings.
This ratio balances income stability with performance incentives, particularly beneficial during longer sales cycles where revenue generation occurs irregularly throughout the year. Establishing clear sales quotas ensures salespeople understand the minimum performance thresholds required to earn their commission portions effectively.
While percentage-based commission models govern sales compensation in many SME situations, business brokerage operates under fundamentally different economic principles where the valuation method itself determines fee structures.
SDE-based valuations common in Main Street businesses drive higher commission percentages due to intensive hands-on work requirements and extended closing timelines. Conversely, EBITDA-based valuations in larger companies command lower percentage fees but incorporate substantial retainer requirements reaching $50,000 upfront.
Key valuation-driven fee variations include:
Smaller deals demand higher commission percentages whilst million-dollar transactions shift towards lower rates with significant upfront retainers.
The valuation method selected fundamentally dictates whether brokers employ percentage-based or retainer-heavy compensation structures. Tiered commission structures may also increase at specific benchmarks, creating alignment between broker incentives and achieving higher sale prices for clients.
The Lehman Formula, developed by Lehman Brothers in the early 1970s, establishes an industry-standard tiered percentage structure for calculating M&A advisory fees on transactions exceeding $1 million.
The standard scale applies decreasing percentages—5%, 4%, 3%, 2%, and 1%—to successive million-dollar increments of the transaction value.
The Double Lehman Formula doubles these rates to account for inflation and the increased complexity of modern M&A processes, making it particularly common in middle-market transactions. Understanding these fee structures provides sellers with a significant negotiating advantage when engaging with investment bankers and advisers.
Introduced by Lehman Brothers investment bank, the Lehman Formula establishes a tiered commission structure that calculates broker fees across five distinct transaction value increments.
The standard breakdown follows a 5-4-3-2-1 percentage pattern, applying different rates to successive million-dollar segments rather than a single percentage to the total transaction value.
The calculation methodology operates as follows:
For example, a $5 million transaction generates $150,000 in total fees.
The formula guarantees higher compensation on initial transaction amounts whilst providing cost predictability for sellers. Developed in the late 1960s, the scale originally applied to transactions exceeding $1 million in value.
Business brokers primarily apply this structure to small and medium-sized business transactions, where it serves as an industry benchmark for transparent fee negotiations.
Since economic conditions have evolved dramatically from the 1970s introduction of the original Lehman Formula, the industry developed the Double Lehman Formula to maintain compensation relevance for modern M&A transactions. The doubled percentage structure compensates for decades of inflation and addresses the gap between transactions that were once considered very large at $5 million.
| Transaction Tier | Original Lehman | Double Lehman |
|---|---|---|
| First $1M | 5% | 10% |
| Second $1M | 4% | 8% |
| Third $1M | 3% | 6% |
| Fourth $1M+ | 2% | 4% |
This adjustment reflects greater transaction complexity and extended closing periods in today’s deal environment. Middle market transactions particularly benefit from this structure, where intensive adviser involvement throughout the process justifies higher compensation rates compared to the original formula’s outdated percentages. Similar to energy procurement services, where transparent explanation of options helps clients understand all associated costs, clear disclosure of commission structures ensures informed decision-making in financial advisory relationships. The Double Lehman Formula remains commonly used in middle market transactions where deal complexity requires substantial advisory support.
Comprehending how these formulae work requires examining specific calculations with concrete numbers. A $5 million transaction demonstrates the incremental tier approach clearly:
The total commission equals $150,000, representing 3% of the entire transaction value.
Under Double Lehman, the same $5 million deal doubles each tier (10%-8%-6%-4%-2%), producing $300,000 in total fees. This Double Lehman variant skipped odd numbers in its percentage structure, applying only even-numbered rates across the transaction tiers.
Investment banks calculate commissions incrementally rather than applying flat percentages to entire transaction values. Success fees become payable only after funds clear and transactions officially close, protecting both parties throughout the process.
Business brokers and M&A advisers establish minimum fee thresholds to guarantee compensation aligns with the time and knowledge required for transaction facilitation.
Standard minimums range from $10,000 to $25,000 for small business sales, whilst M&A advisers handling lower middle-market transactions set floors between $35,000 and $50,000. Upper-tier advisers require minimums reaching $250,000 for larger deals.
Geographic location notably impacts fee structures. Urban markets like New York and San Francisco command rates 25-30% above national averages, whilst Texas and Florida markets remain more competitive with negotiated pricing below standard rates.
Experienced brokers frequently charge upfront retainers, sometimes reaching $50,000 for thorough valuations. The flat commission model may disincentivise brokers from implementing value improvement strategies that could increase the final sale price.
Industry complexity also influences minimums—healthcare practices face 12-15% minimum fees due to licensing requirements, whilst technology companies encounter premiums for intellectual property proficiency.
While minimum fees establish the baseline costs sellers can expect, multiple interconnected factors fundamentally shape what business owners actually pay for brokerage services.
Business complexity greatly impacts pricing:
Geographic location creates substantial variation, with urban markets like New York and San Francisco seeing broker fees 25-30% above national averages.
Industry-specific requirements also drive costs higher—medical practices typically see 12-15% commission rates due to complex licensing and buyer qualification processes.
Transaction size influences whether brokers charge percentage-based fees or shift to billable hour models for higher-value deals.
Traditional commission-only models no longer represent the full range of available broker compensation structures in the SME financing sector.
Hybrid fee-plus-percentage arrangements combine fixed service fees with smaller success-based commissions, creating more predictable cost structures whilst maintaining performance alignment.
Performance-based bonus structures extend beyond simple transaction success to reward brokers for measurable outcomes such as favourable loan terms, faster closing timelines, or improved client financial metrics.
Many business brokers have adopted payment structures that combine upfront retainer fees with reduced success-based commissions, creating a middle ground between pure commission models and flat-fee arrangements.
These hybrid models typically require $2,000 to $8,000 upfront for smaller businesses, with larger enterprises facing retainers up to $50,000. The success fee component ranges from 1-3% of the final sale price, considerably lower than traditional 8-12% commission structures.
The upfront retainer covers critical initial services:
This structure demonstrates seller commitment whilst reducing broker financial risk.
Minimum fee thresholds between $10,000 and $25,000 still apply, positioning these arrangements as premium service alternatives that appeal to serious sellers seeking reduced overall commission burdens.
Beyond percentage-based commissions and flat retainers, some business brokers structure their compensation around performance-based bonuses that reward specific achievements during the sale process.
These bonuses typically tie to milestone completions such as securing qualified buyers, reaching letter-of-intent stage, or closing transactions within target timeframes.
Similar to tiered achievement systems, brokers may earn escalating bonuses when sale prices exceed predetermined thresholds—for example, receiving 50% of potential bonus at 80% of target valuation and full amounts at 100%.
Some arrangements incorporate spot bonuses for exceptional performance during critical negotiation phases.
Project-based structures maintain broker motivation throughout entire engagement periods whilst aligning incentives with client objectives.
This performance-linked approach removes subjectivity through quantifiable goals and directly connects broker compensation to measurable transaction outcomes.
Comprehending the actual financial impact of broker fees requires examining concrete examples across different business valuations and structures.
A $400,000 retail shop incurs $40,000 in commission at the standard 10% rate, plus approximately $6,500 in supplementary expenses for legal, accounting, and marketing services.
For a $1.5 million technology company using a tiered structure, total broker fees reach $152,500.
Real-world scenarios demonstrate significant cost variations:
Urban markets like NYC and San Francisco command fees 25-30% above national averages, whilst rural markets enforce $15,000-$25,000 minimums regardless of percentage calculations.
