Understanding Hidden Broker Fees

How They Affect Your Deal

As a seller, your primary focus is on getting the best price and terms for the sale of your business. However, it’s crucial to be aware that some brokers may be collecting additional fees—like finder’s fees from the buyer and referral fees from lenders—that are not always disclosed to you. These undisclosed fees can potentially influence the broker’s motivations and the outcome of the sale, often without you realizing it.

Here’s what you need to know:

1. Finder’s Fees from the Buyer

Brokers may collect a finder’s fee (typically around 3%) from the buyer for matching them with your business. While this fee is paid by the buyer, it creates a situation where the broker’s incentive may not be fully aligned with your interests as the seller.

• Why this matters: If the broker is getting a substantial fee from the buyer, they may be more motivated to push for a quick deal or favor the buyer’s terms, even if those terms aren’t necessarily in your best interest.
• Example: If the broker receives a 3% finder’s fee from the buyer on a $3.3 million sale, that’s $99,000 that the broker makes just from the buyer. This financial incentive might lead the broker to prioritize closing the deal over negotiating a higher price or better terms for you.

2. Referral Fees from the Lender

In some cases, brokers also collect a referral fee (often 1%) from the lender for referring the buyer to a particular financing source. Again, this fee is often not disclosed to the seller, and it raises concerns about conflicts of interest.

• Why this matters: The broker’s referral fee from the lender may influence their advice on which financing option the buyer should use. They might encourage the buyer to work with a lender who offers better terms for the broker rather than what’s best for the buyer or what would help close the deal faster.
• Example: On a $3 million loan, a 1% referral fee means the broker collects $30,000 from the lender. This might lead them to push the buyer towards that lender, even if another financing option would be more favorable for the transaction.

3. Lack of Disclosure and Potential Conflict of Interest

One of the biggest concerns is that these additional fees are often not disclosed to the seller. This lack of transparency can create a situation where you are not fully aware of all the financial incentives at play, and it raises ethical concerns:

• Conflict of Interest: By receiving fees from both the buyer and the lender, the broker may no longer be fully aligned with your interests. They may prioritize closing the deal quickly to maximize their commissions and fees, even if it means compromising on price or terms.
• Incentive to Lower the Sales Price: If the broker is getting paid from multiple parties, they might be less motivated to fight for the highest possible sale price for you because they are making money from the buyer and lender, regardless of the final price.

4. Impact on the Seller

As the seller, these undisclosed fees can hurt you in several ways:

• Undermining Trust: A broker who doesn’t disclose these fees creates a potential conflict of interest that could affect the integrity of the sale.
• Reduced Leverage: If the broker is working closely with the buyer and lender to maximize their own income, you may have less leverage in negotiations, potentially resulting in less favorable terms for you.
• Misaligned Priorities: The broker may push for a faster close rather than negotiating harder to secure the best possible price or terms for you. This could cost you money in the long run, even if it’s not immediately apparent.

5. What You Can Do as a Seller

To protect yourself from these potential conflicts and ensure that your broker is acting in your best interest, you can:

• Ask for Full Disclosure: Insist that the broker discloses all fees they are receiving from any party, including the buyer and the lender. This will help you understand their motivations and ensure transparency.
• Review the Broker Agreement Carefully: Make sure that the broker agreement explicitly states how they will be compensated and whether any additional fees (such as finder’s fees or referral fees) are being collected from other parties.
• Negotiate the Terms: If you find that the broker is receiving these extra fees, you can negotiate a reduction in the commission you’re paying as the seller, or request that any referral or finder’s fees are disclosed upfront and shared with you.
• Choose a Broker with Transparent Practices: Work with a broker who is upfront about their fees and who makes your interests their top priority. A broker who only gets paid by you, the seller, is more likely to be fully aligned with your goal of getting the best possible price and terms.

Conclusion: Transparency Is Key

While it’s common for brokers to receive fees from multiple parties, what’s important is that these fees are fully disclosed so you can understand the broker’s motivations and make informed decisions. If these additional fees are hidden from you, the broker may be operating with conflicting interests that could negatively impact your final proceeds from the sale. As the seller, you should ensure that your broker is acting transparently and in your best interest to get the best outcome for your business.

This explanation helps the seller understand how undisclosed finder’s fees and referral fees could impact the sale, and it emphasizes the importance of transparency and ensuring that the broker’s incentives are aligned with the seller’s goals.