Questions constantly arise about Brokers’ Commissions:  What are they and why are they frequently higher than the rate charged by Residential and Commercial Real Estate Brokerages?

The levels of Commission Rates are negotiated between the Seller and the Broker.  Although those fees may be similar in various regions, and even to a large degree, across the Country, there is no specific percentage that is designated by any particular governmental or association authority.  In fact, to do so may be illegal.

It may be that some Brokers will state a specific rate and refuse to negotiate; but that is their prerogative, not because there is some law or organization that stipulates such a decision.

Some Sellers may ask, “My business is so small; can you discount the fee?”  Again, some Brokers will, but others will specifically refuse to discount smaller deals, for several reasons.  First, because if the rate is quoted on a percentage basis, the Broker’s own fee is reduced, simply because a percentage of a smaller sale obviously represents a smaller dollar return to the Broker.  And second, because smaller deals are frequently more difficult, time consuming and expensive for the Broker, than a larger deal.  Many larger companies have better books, more detailed accounting systems, more documentation, better advertising…all things that help in making the pricing and presentation to prospective Buyers easier on the Broker.  When a smaller business is asking for a discounted commission rate, he/she is asking for the Broker to accept a smaller percentage of a smaller price – so in effect, the Broker’s dollar amount is reduced twice – in exchange for the privilege of working twice as hard, in some cases.

Some Brokers will, some will not.  And sometimes, it will depend on the business itself:  How much is that business in demand?  How good are the records?  How cooperative is the Seller?  In the vast majority of cases, if Real Estate is involved, the Broker will offer a reduced rate, without being asked.  But again, it depends on the Broker – it is all subject to negotiation.

Moreover, some Brokers charge for Inventory, while others do not.  Some Brokers that charge their fee to include the Inventory may charge a lesser percentage than those that do not figure Inventory into their fees.  But not always.

You, as the Seller, have to know what you are being charged, BEFORE you get to the settlement table.  BEFORE you sign that Listing Agreement.

Frequently, we are asked why our Commission percentages are higher than Residential Agents’ charges.  The answer is relatively simple.  When a Residential Agent lists a property, the Agent puts a sign on your lawn, puts it into a Multiple Listing system, puts a lock on your door that allows all Agents in the area the opportunity to show your home, without the Listing Agent being present.  That Listing Agent may not even know your home was shown until the next day, when he/she gets a report from an appointment company that handles the showing schedules.

When your business is up for sale, obviously we do not put a sign in the window!  In fact, the advertising – whether on our Web Site, some multiple listed database, or in other media – is always done in an abstract and confidential way, so that the casual reader cannot identify your business.  The promotion (by any responsible Broker) should give enough information to make it attractive and interesting, but not enough to allow your employees, landlord, vendors and customers to know that your business is for sale, and become alarmed.

That means that each and every business is, by necessity going to require much, much more personal attention, personal communication and personal TIME, for every potential Buyer.  The responsible Broker goes through several stages of qualifying every single Buyer, and giving those individual Buyers information ABOUT the business, BEFORE he/she ever gets the identity of the business, itself.

This means that Brokers do not necessarily earn more than Residential Real Estate Agents; they frequently earn less, because they cannot do the volume of sales transactions their Real Estate compatriots do, and each deal normally takes far longer than the average Residential sale.  This DOES NOT mean that Residential Agents do not work for their commissions – far from it!  It is simply a different business, with different responsibilities and requisite skill sets.

We only accept about 30% of the businesses we are asked to list.  And one of the big reasons is that we feel that we cannot list too many businesses at any one time, and still do justice to each.

Some Brokerages brag that they have 400 or 500 listings!  We are uncertain why some sellers thing that is such a good thing.  Unless they have more than 50 Agents, how can such a Brokerage promote any of those businesses, competently?  (And by the way, the same can be said for Commercial Real Estate.  We have tried to relocate several of our Clients, and found that the major Commercial Real Estate Brokers do not always know their own listing portfolio, because of the volumes they carry!)

In fact, what happens is that those kinds of Brokerages typically specialize in something like Convenience Stores or Liquor Stores – something that is high in demand and volume of potential sales.  Some go so far as to post their listings on an erasable board, in their offices.  On the basis of the claim that they have that number of listings, they invariably get Buyers simply walking in to their doors.  The Buyer says he is looking for a Convenience Store, and the Broker points to the listing board and invites the Buyer to pick one out!

That is great for the Buyer – but it does NOTHING to promote your individual business!

If you have a Liquor Store or a Convenience Store to sell, that may work for you.  There is nothing wrong with that approach, legally or ethically.  It is a matter of style, and whether that fits into your need.

If you are a Buyer, the real danger with that scenario, is that many of those listings are not real listings, at all.  We are familiar with one Brokerage that boasts about that kind of listing volume, except we have been told by both Buyers and Sellers alike that most of those are not real listings.  They are a function of a Business Owner telling the Broker, “If you find a Buyer willing to pay a quadrillion dollars for my business, call me.”

That means that the Broker really has no idea about the true value of the business…because he/she has no idea of the Cash Flow of the business…because he/she has never actually seen any written documentation on the business!

When you are looking to buy or sell, actually talk to the Broker, before you do anything.  It should not take you long to determine whether he/she knows what he/she is talking about.  If they are just throwing stuff against the wall to see what sticks, regardless of which side of the deal you are on, your interests will not be well served.

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Or, you may contact us at combroker@bafgroup.com. Thank you for your interest.)

Advertisements