Buying or selling a business is a significant financial transaction that requires careful budgeting. For many, it will be the biggest investment they ever make, with more years of life and money involved than even your home or your retirement or your estate plan. That’s why, whether you’re buying or selling, you must get the proper professionals involved early in the process, and make sure you plan for adequate budgets to allow those professionals to protect your investment. Here’s what to consider when building a plan and a budget for your business transaction.
Legal Costs (1-5% of Sale Price)
Legal representation is crucial in any business sale to ensure the transaction is legally sound, protect your interests, and mitigate risks. Buyers and sellers should expect to spend approximately 1-5% of the sale price, with roughly 1-3% standard on larger deals and 3-5% on smaller deals on legal fees, which typically cover:
- Negotiating and drafting the purchase agreement
- Conducting due diligence
- Addressing regulatory compliance issues
- Handling lease assignments and contracts
- Structuring the transaction for tax efficiency
- Advising on employment matters and liabilities
Accounting and Tax Advisory Fees (1-3% of Sale Price)
Both buyers and sellers should engage an accountant or tax advisor to ensure the deal is structured in the most tax-advantageous way. These costs vary but may range from 1-3% of the sale price. Expect expenses for:
- Financial due diligence (for buyers)
- Tax structuring and planning
- Valuation support and earnings verification
- Closing balance sheet adjustments
Business Valuation Costs (1-2% of Sale Price)
A professional business valuation provides an objective assessment of the company’s worth. While some transactions may not require a formal valuation, in cases where it is necessary, costs typically range from 1-2% of the sale price, depending on the size and complexity of the business.
Broker or Investment Banker Fees (5-10% of Sale Price)
If a business broker or investment banker is involved in the transaction, their fees can range from 5-10% of the sale price for smaller businesses and 1-5% for larger businesses. These fees cover:
- Marketing the business to potential buyers
- Identifying and vetting potential buyers or sellers
- Negotiating the transaction
Due Diligence Costs (1-3% of Sale Price)
Beyond legal and accounting, buyers may need to budget for additional due diligence costs, which can include:
- Environmental assessments
- Technology and cybersecurity reviews
- Inventory and equipment appraisals
Financing Costs (1-3% of Loan Amount)
For buyers using financing to purchase a business, there will be costs related to securing a loan, including:
- Loan origination fees
- SBA loan guarantee fees
- Lender’s legal and due diligence costs
Transition and Integration Expenses (1-3% of Sale Price)
After closing, both buyers and sellers should plan for transition-related expenses, which may include:
- Employee retention bonuses
- Training and onboarding costs
- Technology and operational integration
- Marketing and rebranding
Why Budgeting for These Costs is Essential
Many business owners are tempted to cut corners by handling aspects of the transaction themselves or skipping key professional services to save money. However, failing to budget for these costs can lead to significant financial and legal risks, including disputes, unexpected liabilities, and unfavorable deal terms. Professionals such as attorneys, accountants, and brokers provide essential expertise to navigate complex transactions, ensuring compliance, risk mitigation, and financial efficiency. By investing in these services, buyers and sellers can avoid costly mistakes and increase the likelihood of a successful, legally sound transaction.
Conclusion
A well-planned budget with a team of great professional advisors is essential for any business sale or purchase. It will protect your investment for years to come. Legal fees, accounting costs, broker commissions, and due diligence expenses should all be factored into your financial planning. By setting aside appropriate percentages of the sale price for legal, accounting, and other professional services, business owners can avoid surprises and ensure a smooth transaction.
If you’re considering buying or selling a business, consulting with experienced professionals early in the process can help you budget effectively and maximize the value – as well as minimizing the risk – of your investment.
