Broker fees - Is a 15k retainer and 8% of closing price too high?

May 11, 2023

by a searcher from Iowa State University of Science and Technology in Chicago, IL, USA

I have gotten introduced to some smaller brokerages as part of my deal sourcing. However, It seems like the fees and retainers are quite high. I have not worked with a broker before, so I am curious to what people are seeing out there for fees. I was given a quote from one brokerage to be a 15k retainer and 8% of closing price ( without any negotiations). What quotes are other getting?

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Reply by an intermediary
from University of Wisconsin in Lawrence, KS, USA

The fee a professional buy side business intermediary should and usually does charge will vary depending on the scope of the engagement, the size of the buy side target and the size of the target's market. For a small add on, the fee as a percentage of purchase price will be less than for a large platform. Further for a full blown custom search, entailing a lot of research, marketing, etc and take it all the way to closing, that fee will be more than the same search but taking it only to the client introduction where the client takes it on from there.. As an example, we charge a Lehman of 6,5,4,3,2 for sourcing, securing, and intro to our client, for say a PE group that doesn't need for us to negotiate, structure and manage the due diligence through closing. For clients who are just starting out on a new search to their first or second acquisition, they usually want us to manage the entire process, in which case our Lehman fee is 10,8, 6,4,2 with about 1-2% of the estimated final closing fee as a monthly retainer advance. Lehman formulas tend to work well because they more accurately reflect the amount of work due to economies of scale. i.e. there is not 5 times as much work for a $50 mm target than a $10 mm target, but might be 2-3 times the work. So is 8% too high? It all depends on the above.

Reply by an intermediary
from University of Memphis in 5000 Linbar Dr, Nashville, TN 37211, USA

The first point is that the fee should depend on the services a buyside broker provides. If the broker is simply reaching out for existing listed business the fee should be minimal. If the broker is conducting a custom search there is significant work, expense and time involved and with few true buyside brokers the fee range is varies significantly. We charge a small retainer and a success fee that uses a modified Lehman structure. We understand brokers that charge a monthly fee as the buyer can decide to buy a business outside of the search, take a corporate job and just stop the search, resulting in no income for the work for the buyside broker. We believe that any upfront fees should be applied to the success fee and the total fee should not exceed 6%. So the $15K retainer and 8% success fee seems very high. We normally find that sale side fees are higher than buyside fees, even though normally there is less work and if the business sells the broker is assured of a payment.

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