Selling Your Business is a Big Deal!
How much will it all cost? There has been so much time, sweat equity and bootstrapping have been invested into your business that’s provided for you, your family and your employees for years! As a business seller‚ there are various costs along the way and due at the closing table. Estimating what these numbers are is critical in determining what your net proceeds will be. The businesses’ fees will be determined by the type and size of your business, the industry you’re in, the nature and complexity of your case and more. There will be major costs associated with selling your business, minor costs and there may be other costs‚ fees‚ penalties‚ etc. depending on your specific case, and it’s important to understand what your obligations are before you list your business for sale.
Attorney. Your counsel reviews and negotiates the LOI (letter of intent), purchase agreement, representations and warranties, multiple doc reviews, disclosure schedules, working capital mechanics, and closing conditions. An M&A attorney is a specialized practice and cannot be substituted by another practice area. They are not the same attorney who handles your entity work or general business matters — and no, your brother-in-law can’t ‘do it to save you a few bucks.’ Use someone else and they will cost you hundreds of thousands of dollars to millions. These are facts, not conjecture.
Complexity is the main driver of cost in every transaction. A simple $10MM asset sale to a strategic buyer, with no earnout or rollover equity, is far less complex than a $30MM C-corp stock sale to a financial buyer, rollover equity, R&W insurance, a management carve-out, and a 12-month earnout. The deal structure, language and mechanics will affect your cases’ complexity and consequently the fees. Larger businesses with multiple departments or diverse assets typically incur higher legal fees due to the increased legal work required. If you encounter buyer’s counsel with an aggressive posture on the purchase agreement can negatively impact your attorney’s hours in preparation and execution for example.
Both buyer’s and seller’s counsel can be overly sensitive, rightly so, to minimize risk for either party. Heavily negotiated reps and warranties, add disclosure schedule time and indemnification risk modeling and the layers increase. Broken deal fees can be incurred should the case fall apart after LOI, also. Counsel is to ensure legal compliance and negotiate the best terms on your behalf are just some of the factors influencing legal costs.
A transaction around $3MM will likely incur somewhere around $25,000; while a $15MM case may incur legal costs up to $75,000 or more. Complex cases can add an additional $10,000 to $150,000 depending on EV – enterprise value. Some attorneys charge hourly rates, which can range from $400 for an associate to over $1,000 for a partner, depending on their experience. Some M&A attorneys may offer a flat fee for specific services related to the sale, providing more predictable costs.
M&A Advisor. A monthly retainer is typically paid throughout the engagement, and is often 6–12 months in length. Sometimes, fees can be credited against the success fee at closing. The M&A advisor earns the fee by leading the sale process: preparing the Confidential Information Memorandum (CIM), identifying and evaluating buyers, managing competitive bids, negotiating the LOI and key deal terms, driving the transaction through due diligence and certainty to close. For example, on a $15MM case, expect to pay $50K–$120K in retainer before the success fee kicks in. At JSP, you can see our fee schedule here.
Quality of Earnings. A Quality of Earnings (QoE) report is an independent financial analysis of your EBITDA and revenue — not an audit, but a deep analytical review of your financials. The QofE is ideally prepared by a certified firm. On lower middle-market cases, buyers will require one. At JSP in specific cases, our NAVCA certified valuation experts may execute a QofE on your behalf. Performing a sell-side QofE before going to market protects your valuation, it normalizes add-backs in your favor and prevents buyers from using their own QofE to erode your multiple at closing.
Having a sell-side QofE will likely provide an ROI or additional turn or two on your EBITDA. For example, on a $10MM EV case, the cost of this report is less than ½ percent. If your EBITDA runs between $10-30MM, then your report cost will be somewhere between $50,000 and $100,000. Regional Big 4 offices typically charge 30–50% above the range listed. Some financial buyers will perform their own QofE whether we perform one or not. Would you prefer to have a home inspection, know what’s going on with your home before you sell and what it’s truly worth, OR would you rather the buyer hire an outside firm who’s paid more to find more faults with your home? Your sell-side QofE is minimizes the buyer’s report of becoming a surprise and adversarial, which means leverage for you.
CPA and Tax Advisory. Your CPA may or may not be the right choice for M&A tax work depending if they have significant transaction expertise. It’s okay if they don’t as we will provide recommendations from our local, regional and national relationships. Deal-specific tax advisor’s cover: modeling after-tax proceeds under different deal structures (asset vs. stock, installment, QSBS), reviewing the purchase price allocation for asset treatment, advising on QSBS eligibility and stacking mechanics, pre-close tax planning (CRT funding, GRAT timing, trust structures), post-close estimated tax deposits (safe harbor planning), etc.
For a $5M–$25M deal, deal-specific tax advisory typically runs $15K–$60K, on top of your normal annual CPA engagement. If you hire a fee-only financial advisor who specializes in business exits, that engagement overlaps significantly with this work — often replacing or reducing your CPA cost exposure for the financial modeling portion.
Reps & Warranties. Representations and warranties (R&W insurance) cover indemnification claims arising from breaches of the seller’s representations and warranties in the purchase agreement. In English, it’s replaced traditional seller escrow holdbacks in lower middle-market M&A — the insurer backstops the claim, not the seller’s proceeds. Most R&W policies today are purchased by the buyer. They control the coverage and claims go directly to them. Some cases are negotiated to include seller contribution to the premium. Budget 10–15% of EV × 2.5–3% for the seller’s share of the premium. That expense nets to ¼ to ½ of your total EV when you’re asked to contribute, or 0 if the buyer absorbs it entirely.
Back in the day and some buyers may want up to 10% holdback in escrow of net proceeds to cover unexpected issues related to R&W. The policy limit is typically 10-15% of your EV with a deductible and a coverage period of 3 years for general reps and 6 years for fundamental reps such as title, authorization, taxes and fraud. Financial buyers and the larger strategics almost always require R&W.
Escrow Holdback. An escrow holdback is not a transaction cost — it’s a portion of your proceeds set aside in escrow to cover post-close indemnification claims. You get it back less any claims when the escrow period ends, and it matters because you cannot spend it at close. Escrow amounts are declining being replaced in favor of R&W insurance as described above. Pre-R&W, seller escrows of 10–15% of EV held for 18–24 months were standard. As R&W insurance has become the primary claims mechanism. There still may be a smaller escrow amount with R&W typically 0.5–2% of EV, held no more than 15 months, which JSP will negotiate down if not eliminate. Without R&W, $1M–$1.5M could be tied up for nearly two years. This distinction matters for post-close financial planning, especially if you’re using proceeds to fund a Roth conversion ladder or retirement portfolio. Your mileage may vary and your Wealth Advisor will be on point.
Potential Secondary Costs
VDR. We will host your virtual data room once the LOI is signed as a nominal monthly line-item expense. The sooner the data is uploaded the better. Our expectation is much of the documentation most buyers require will be populated during the week your VDR goes live. We guide you through this process or you can have us accelerate this with you. That data is yours regardless who the buyer is and through exclusive period should the buyer change.
State Transfer and Stamps. Asset sales in some states trigger transfer taxes on real property, equipment, or business licenses. Key exposures include real estate as part of the deal, and license transfer fees which widely vary.
Management. Key employees staying through closing oftentimes up to 24 months post-close transaction bonuses are common. A typical budget is 1-2% of deal value split among 2–5 key employees. These are ordinary income to employees and deductible to the selling entity — but must be structured carefully to avoid triggering §280G golden parachute excise tax in cases where the deal accelerates existing equity.
Although it’s not a direct cash cost, the disruption of day-to-day business is real and can be frustrating. Plan for best case 3 months and worse case 7 months or longer of significant management distractions, including buyer presentations, repetitive due diligence responses, multiple doc reviews, deal team advisory calls and meetings. Many of our clients reported (71% respondents) managing the sale process is a full-time job alongside running the business.
Total Business Case Costs. Our statistics closely reflect typical transaction costs nationwide.
EV (Enterprise Value) TTC$ (Total Transaction Costs) % to EV
<$10MM $400K – $2MM 10 – 20%
<$15MM $750K – $2.5MM 8 – 16%
<$25MM $1MM – $3MM 6 – 12%
<$50MM $2MM – $4MM 4 – 10%
<$100MM $4MM – $7MM 3 – 6%
These ranges are best estimations and assume a competitive process, R&W insurance, a sell-side QofE, and no major broken-deal costs, clean to complex deal structures, motivated to contentious buyers, various earnout provisions, rollover equity, or deals that extend past 9 months and efficient execution. Your costs will vary, which is why planning and preparation years in advance is critical.
“The best time to plant a tree is twenty years ago. The second best time is now!” – Chinese Proverb
What Reduces Costs
Is there room to reduce costs? Yes, be 90% or greater prepared. You won’t reduce costs by cutting corners on the elements that protect your proceeds. What can be negotiated? Everything is negotiable to a reasonable degree. In certain circumstances we may credit a portion of the monthly retainer to the success fee at closing. Some of our peer’s credit 50-100% and others do not. The largest driver of legal overruns is scope creep and having clarity upfront about what level of review is appropriate for your specific case. In a seller’s market, buyers will absorb the full R&W premium. In a buyer’s market, sellers are asked to contribute.
Do Not Cut
A $36,000 QofE prevents a $200,000 post-LOI price reduction is the highest-ROI spend in the transaction. Don’t cut your nose off despite your face. An LOI and purchase agreement negotiated by a generalist attorney can leave a representation exposure far exceeding the fee savings. Middle-market M&A is a specialty! The decision to engage a fee-only financial planner at least 2–5 years before the sale will produce tax savings that dwarf all transaction costs combined.
I sat where you sat years ago and said the same thing after reading a similar article, “Holy Shit!” The reality is the best time to plan your exit is the first day after starting your business! Nearly forty years later, I’ve heard no better answer. The mindset can stay in WTF-mode looking over the last 20 or 30 years of your business life, or the mindset can shift to, “…we have a little bit of work left.” It truly is a big deal selling your business.
