Understanding Sales Price vs. Borrowing Limitations

It’s great that a broker is optimistic about getting you a higher sales price. However, it’s essential to understand that buyers—especially in small or mid-sized business acquisitions—are typically limited by how much they can borrow, regardless of what price the broker thinks they can achieve. This limitation can directly impact your net proceeds from the sale, particularly when you’re working with an expensive broker who charges higher commissions.

Let’s walk through the key points:

1. Buyer’s Borrowing Limit

Most buyers of businesses rely on financing to complete the acquisition. Typically, buyers can borrow up to a multiple of your business’s cash flow. In this example, the buyer’s maximum borrowing capacity is $3 million, based on a cash flow of $500,000 (6 times cash flow).

Regardless of the sale price, the buyer’s ability to pay is capped at $3 million in financing, plus any cash they can put down. This means that no matter how high the sales price goes, the buyer will need to cover the difference with cash or renegotiate the price.

2. Higher Sales Price Doesn’t Always Mean More Proceeds

Even if the broker is promising to get you a higher sales price, if the buyer can’t secure additional financing beyond $3 million, they will need to make up the difference in cash. This can be a significant hurdle for the buyer, who may not have the funds to pay the extra amount, or they might push to renegotiate the sale price down to what they can afford.

3. Expensive Broker Fees Decrease Your Net Proceeds

If your broker charges a higher commission, it directly eats into the net proceeds you receive after the sale. Here’s how:

Example: Sales Price of $3.3 Million

• Maximum Loan Amount: $3 million (buyer’s borrowing limit based on cash flow).
• Down Payment: $300,000 (10% down payment from the buyer).
• Total Sale Price: $3.3 million.

Now, let’s consider the broker’s commission:

Scenario A: Expensive Broker with 10% Commission

• Commission: 10% of $3.3 million = $330,000.
• Net Proceeds to Seller: $3.3 million – $330,000 = $2.97 million.

Scenario B: Standard Broker with 5% Commission

• Commission: 5% of $3.3 million = $165,000.
• Net Proceeds to Seller: $3.3 million – $165,000 = $3.135 million.

4. The Reality of Borrower Limitations

Even if the expensive broker tries to get you a higher price, the buyer’s borrowing limit of $3 million means they will either:

• Struggle to cover the extra $300,000 in cash (on top of the loan), or
• Negotiate a lower sale price, reducing the final price you receive.

Since the buyer is constrained by what they can borrow, even if the broker secures a higher price, the extra commission costs will likely reduce your net proceeds. In Scenario A (10% commission), you end up with $165,000 less in net proceeds than in Scenario B (5% commission), despite the higher sales price.

5. Net Effect: Higher Broker Fees Could Decrease Your Profits

Because borrowers are limited by how much they can pay, a higher sales price may not result in more money for you, especially when you’re paying a higher broker commission. The reality is that:

• High commission fees reduce your net proceeds.
• Borrowing limits prevent buyers from paying far beyond what they can finance, no matter how high the broker claims they can push the price.

Conclusion: Focus on the Bottom Line, Not Just the Sales Price

While a higher sales price sounds attractive, what really matters is how much net profit you take home after fees and commissions. Since borrowers are limited by how much they can finance, pushing for a higher price may not yield the best results—especially when the broker is taking a large commission. Lower broker fees and realistic pricing based on the buyer’s borrowing capacity will likely result in higher net proceeds for you in the end.

By focusing on net proceeds instead of the gross sales price, this explanation shows the seller that higher broker fees can significantly reduce their profits, especially when buyers have limited financing options.