What is a finder’s fee? When used correctly, finder’s fees benefit all parties involved. Often, without an intermediary earning a finder’s fee, a transaction between two parties would not occur. This post explains what a finder’s fee is, how it works, and includes a finder’s fee agreement sample.

Finder’s Fee Meaning

A finder’s fee, also known as a “referral fee” is a way for one party to compensate another for a referral. The earner of the fee, or “finder,” typically provides an introduction of two parties (often a buyer and a seller) who did not previously know each other. Because the introduction is potentially valuable to at least one party, one or both of the parties are willing to pay a fee for the introduction. Hence the term Finder’s Fee.

Most finders’ fees are contingent upon some event or transaction actually occurring. In other words, the finder is not compensated until/unless the parties find the introduction valuable and complete a transaction. Upon the official transaction, the finder earns the fee.

Finder’s Fee Agreement

While it is possible that a finder could have a verbal arrangement with another party, they are usually documented in a written contract. For example, if you have a friend who would like to sell his mint condition 1972 Chevrolet Corvette, he might agree to give you a $5,000 finders fee if you bring him a qualified buyer and the transaction closes. A transaction like this might be a handshake agreement and there is no need for a written contract. On the other hand, if your neighbor wants to sell his $100 million company, and you know a potential buyer, finalizing the terms of your engagement in a written contract is an important step in the process.

Who Pays the Finders Fee? The Buyer or the Seller?

Either one! The Finder typically enters into a contract (“Finders Fee Agreement”) with either the buyer or the seller. In rare cases, the Finder might enter into a contract with both the buyer and the seller.

What Is Included in A finder’s Fee Contract?

Please see the sample Finder’s Fee agreement at the end of this post. A finder’s fee contract includes key provisions including but not limited to:

            Names of all parties involved

            Length of the contract

            What services are being provided and what has to occur for the fee to be earned

            Confidentiality and non-circumvention

            How is the fee calculated and paid

How are Finders Fees Calculated

Finders Fees are negotiated between the parties in the agreement. The fee is generally aligned with the value of the introduction and the value of the transaction. When selling a business, the Finder’s Fee is frequently based on the Lehman Formula. See the example below for a Fee Agreement that utilizes the Lehman Formula.

Does Private Equity Pay Finders Fees

Yes! Private equity firms regularly enter into buyer paid fee agreements that are are paid upon a successful transaction closing.

Finder’s Fee Agreement Sample

Note: This is an example of a Finder’s Fee, and it is not intended for your use. 1719 Partners is not providing legal advice. This sample agreement uses a Lehman formula.

This Fee Agreement (“Agreement”), dated as of [insert date here], sets forth the terms and conditions upon which [insert finder name or legal entity here] (“Finder”) shall act as non-exclusive finder for [insert buyer or client name here](“Client”) and/or its assigns for two (2) years from the date hereof (“Term”).  In such capacity, Finder shall introduce representatives of the Client to the owners and senior executive officers of [insert target company name here] (“Target”)and shall obtain and provide information regarding the business affairs and prospects of Target, including detailed financial statements and any other information reasonably requested by the Client, in connection with any due diligence investigation Client may undertake (the “Services”).

Client hereby engages and agrees to cause Finder to be compensated if Finder’s introduction to Target during the Term results in Client purchasing 25% or more of the capital stock of Target, or all or substantially all of the assets of such candidate, within 24 months of the date Finder introduced such qualified investment candidate to Client (a “Transaction”).

In consideration of Finder’s provision of the Services, if a Transaction is consummated, a finder’s fee (the “Fee”) shall be paid, or caused to be paid, by Client to Finder on the day of the closing of the Transaction, such Fee to be based on the Purchase Price (as defined below) paid by Client in connection with the Transaction. Such fee shall be computed as follows:

5% of the first $1,000,000 of the Purchase Price, plus

4% of the next $1,000,000 of the Purchase Price, plus

3% of the next $1,000,000 of the Purchase Price, plus

2% of the next $1,000,000 of the Purchase Price, plus

1% of the balance of the Purchase Price.

The “Purchase Price” is defined as the aggregate consideration (whether in the form of cash, assumed debt or other non-contingent or non-deferred contribution of value) paid by Client to acquire its equity, debt or other interest in Target. In the event that any portion of the consideration paid by Client to acquire its equity, debt or other interest in Target is contingent or deferred, such consideration will be included in the Purchase Price.

For purposes of this Agreement, the term “qualified investment” shall mean an investment (i) in which Client or its affiliates obtains control of a corporation, limited liability company, partnership or other entity over which it did not have previously have control; and (ii) with respect to which Client has made no contacts with any parties related to such investment, has taken no steps to consider or pursue, has not learned of through any source other than Finder, and about which Client has no information. For purposes hereof, “control” of an entity shall mean the ownership of more than 25% of the equity securities of such entity, or the power to direct or cause the direction of the management and policies of such entity. In the event that Finder discloses to Client the name and address of Target that Client determines is not a qualified investment candidate, or if Client is already aware of Target, Client shall so notify Finder within five (5) business days of such introduction.

During the Term, the relation between Finder and Client is that of unaffiliated third parties. Finder and its officers, directors, employees and agents shall, under no circumstances, be deemed agents, employees, partners or representatives of Client.

Each party shall bear its own costs and expenses incurred in connection with the undertakings contemplated by this Agreement.

This Agreement shall be construed under the laws in the State of [insert state here].

This Agreement may be signed in counterparts, each of which shall be an original, but all of which together shall constitute one agreement.

IN WITNESS WHEREOF, the undersigned have executed this agreement on the day and year first above written.

Client:                                                                    Finder:

What is a Finder’s Fee: In Short

In summary, a finder’s fee is a way to reward an intermediary for linking together two parties who otherwise likely would not have met. It incentivizes the “finder” to forge rewarding connections, as the finder is not compensated until the deal closes. If you have any questions on how finder’s fees work in private equity, 1719 Partners is happy to answer them. Simply contact us here.

If you are considering selling your company, it is important to know an earnout is an option. An earnout can be the bridge between your asking price and what the buyer is willing to pay, allowing you both to accomplish your goals. Understanding how an earnout works allows you, as the seller, to consider all your options. 

This guide explains what an earnout is, when it is used, how it is structured, and common pitfalls. 

What Is an Earnout?

An earnout allows both buyer and seller to settle on a purchase price. In short, an earnout divides up the total purchase price into an immediate payment and a deferred payment. For example, if the seller believes his company to be worth $120 million and the buyer thinks its value is $90 million, an earnout can cover the difference. In this case, the buyer would pay $90 million upfront and structure an earnout for the remaining $30 million. 

An earnout is also contingent upon the performance of the newly purchased company. In other words, there are strings attached. This motivates the seller to increase company performance post acquisition, which reduces the risk on the buyer. Company performance is objectively measured by key metrics that both parties determine beforehand. For example, these metrics can look like meeting a certain revenue or EBITDA margin, or retaining key customers. 

Earnouts in M&A: When Are They Used?

There are many situations where using an earnout makes sense. For example, perhaps the seller has just acquired a big customer or launched a marketing campaign, and expects the business to exceed past performance. The seller believes the purchase price should reflect this advantage, while the buyer is skeptical. After all, from the buyer’s perspective, his or her concerns are valid: what if the big customer falls through, or the marketing initiative fails? 

With an earnout, the seller receives down-the-road payments when the business does, in fact, meet expected performance goals. If the business does not, then the buyer does not have to make the corresponding payment to the seller. Below are some specific situations where an earnout makes sense. 

Bridge a Valuation Gap

If the buyer and seller want to work together but do not see eye to eye on the purchase price, an earnout allows them to move past this hurdle. Another common way to bridge a valuation gap is using a seller note. However, a seller note is not contingent on company performance. While a seller note is nice because it gives the seller guaranteed later payouts, it does not allow the payments to increase based on company performance. Effectively, the payment cap is lower. This may be undesirable if the seller believes his or her company will perform highly in the near future. 

Improve Ownership Transition

Passing the baton is not without risk. To reduce risk of company harm during the ownership transition, the buyer may want to include an earnout. This works because a later earnout payment motivates the seller to set up the company for continued success. In other words, the seller is financially motivated to see the company continue to perform, rather than simply wanting to “get paid and get out.” When the buyer and seller’s interests are aligned in this way, the company has more support to succeed. 

Sell to the Right Buyer

Sellers often want to hand the business off to someone who will continue the business legacy. If the seller finds a buyer with a shared vision for the company, but the parties do not agree on purchase price, this can be disappointing. An earnout allows the seller to “have their cake and eat it too”— not having to sacrifice either purchase price or the ideal buyer. 

If you are struggling to find a buyer who sees eye to eye on your business legacy and also has the capital to help you reach your goals, check out 1719 Partners. Our legacy is supporting your legacy. 

Sell at the Right Time

There are many reasons why it may be the right time for the owner to sell. Maybe he or she is facing health obstacles or burnout, or it is time for retirement. Without an earnout, the seller would have to decide between selling immediately, and receiving a lower purchase price, or waiting a few years until the purchase price can reflect company growth. In fast-growing or newer companies, this issue is extra relevant. An earnout allows the seller to sell at the right time without sacrificing on future business gains. 

Earnout Structures

There are many ways to structure an earnout. Earnouts should have a defined term, typically lasting one to three years. In addition to the term, performance metrics are also clearly defined. This reduces confusion between the buyer and seller. For example, the chosen metrics may be related to revenue, EBITDA, or customer retention. 

Earnouts are also structured through percentages. For example, an earnout might be a percentage of revenue, revenue associated with key customers, or profits or EBITDA. 

Earnout Calculation Examples

Exact earnout payouts are calculated based on the terms. In addition to the percentages mentioned above, earnouts have more detailed terms as well. These specific details limit the earnout’s maximum payments. For example, an earnout might have a lifetime cap of $1 million. This means throughout the earnout’s entire term the payments cannot exceed $1 million. Another structure might be 10% of revenue annually if the agreed-upon metrics are met that year, as well as a yearly maximum payout of $500,000, and a lifetime maximum of $1.5 million. This earnout may also end in four years. In addition, if metrics are not met one year, that year’s payment could be $0. 

Common Pitfalls

As with any legal agreement, there are potential problems. In general, pitfalls are caused by nonspecific terms. Vague terms can look like an open-ended time horizon, no annual or lifetime payment caps, and more. 

Typically, earnouts include a dispute resolution section. This provides instructions for handling disagreements, such as deferring to a third-party accountant or auditor.

Considering an Earnout? 

Are you wondering if an earnout makes sense for you and your company? 1719 Partners has helped structure many successful transactions. We have seen earnouts play a crucial role in meeting both the buyer and seller’s goals. We understand that selling a business is a very personal process and situations can vary widely. 

If you are considering a sale or have general questions about earnouts, don’t hesitate to reach out. 

Selling your business is one of the most important financial decisions you’ll ever make. While many owners hire a business broker to guide them through the process, it’s important to understand how much do brokers charge to sell a business, what services are included in that amount, and how brokers actually work.

Understanding these variables before signing an engagement agreement helps you compare advisors, negotiate better, and decide whether the value provided by a broker justifies their cost.

For a broader look at whether using a broker is right for you, check out our guide to selling a small business.

Who is a Business Broker?

A business broker is a professional intermediary who assists business owners in selling their businesses. They evaluate your business, provide guidance on selling price, market the business, and vet prospective buyers. They act as the bridge between sellers and prospective buyers while managing much of the work involved in bringing a transaction to a successful close.

A business broker’s responsibilities often include:

• Performing an initial business valuation
• Recommending an appropriate asking price
• Preparing confidential marketing materials
• Marketing the business to qualified buyers
• Screening buyers and verifying their financial capability
• Coordinating meetings and due diligence
• Assisting with negotiations
• Helping manage the closing process

Typically, business brokers help small- and lower-middle-market business owners who may not have the time, experience, or network needed to run a competitive sale process themselves.

The goal of a business broker is to get a deal done, often by packaging the business attractively and creating a competitive bidding process. However, neither does every business require a broker, nor are all brokers created equal. So, the value they provide should always be weighed against the fees they charge.

How is a Business Broker Different from an Investment Banker?

Business brokers and investment bankers both provide advisory and consulting services, helping business owners navigate the sale process, but they generally serve different segments of the market.

While largely semantics, most people would say that business brokers tend to focus on privately held small businesses and lower-middle-market companies, while investment bankers handle larger enterprise transactions (i.e., enterprise value in excess of $50 million).

While both of their services often overlap, investment bankers generally provide a broader range of services, including:

• Extensive buyer outreach
• Sophisticated financial modeling
• Valuation analyses
• Investor relationships
• Complex deal structuring
• Capital raising and strategic advisory services

How Much Do Brokers Charge to Sell a Business?

One of the most common questions business owners have to ask is, “How much do business brokers charge?” The answer is subject to several variables, including the anticipated sale price, industry, the scale and complexity of the business, and the scope of services included in the arrangement.

Business brokers typically enter into a formal contract, or an engagement letter, with the clients that outlines the compensation structure, services provided, exclusivity terms, length of engagement, success fee calculation, and reimbursable expenses.

For a very limited scope of work, for example, preparing an offering memorandum or a valuation, the engagement might be a flat fee. If the service provider is an accountant or an attorney, they might prefer to charge by the hour. Most brokers prefer a success fee arrangement.

Business Broker Fees Breakdown

Broker fees can vary significantly depending on the size, type, and complexity of the business sale. The fee structures commonly used by brokers include:

1. Success Fee

Most brokers charge a success fee between 5% and 15% of the final sale price for small businesses. For larger transactions, brokers often use the Lehman Formula, or the Modern Lehman Scale, which tiers fees by price range.

The table below shows a standard (not double) Lehman success fee calculation.

Lehman Commission Structure: Example showing $12,500,000 sale price

5%	0	$1,000,000	$50,000
4%	$1,000,001	$2,000,000	$40,000
3%	$2,000,001	$3,000,000	$30,000
2%	$3,000,001	$4,000,000	$20,000
1%	$4,000,001	And above	$85,000
Total Commission			$225,000

2. Retainer or Upfront Fee

Some brokers require an upfront retainer before beginning work on the engagement. This initial fee usually ranges from $5,000 to $15,000 or more. This covers preparation, marketing, and administrative costs. Some brokers credit the retainer toward the final success fee, while others treat it as a separate, non-refundable charge.

3. Minimum Fee

Some brokers ask for a minimum fee to ensure they are fairly compensated even when selling smaller businesses. This fee commonly falls between $25,000 and $50,000, regardless of the sale price. Let’s say that in a sale, a percentage-based commission would result in only $15,000, but the engagement specifies a $35,000 minimum fee; the seller would pay the minimum amount to the small business broker.

What Do Business Broker Fees Include?

It is important for business owners to understand exactly what they are paying for in a business broker engagement.

Depending on the engagement, broker fees often include services such as:

Business valuation: Settling on a realistic market value using financial analysis, comparable transactions, industry trends, and growth potential.

Marketing strategy: Creating a confidential marketing plan designed to attract qualified buyers without disrupting employees, customers, or suppliers.

Listing and advertising: Preparing confidential information memorandums (CMIs), teaser documents, online listings, and running targeted outreach campaigns.

Buyer qualification: Screening prospective buyers to verify financial capability, strategy fit, and seriousness before any meetings commence.

Negotiation support: Assisting with offers, letters of intent (LOIs), purchase price negotiations, deal terms, working capital adjustments, and transaction structuring.

Due diligence coordination: Helping organize key financial documentation, responding to buyer requests, and keeping the transaction moving toward closing.

Closing management: Coordinating with attorneys, accountants, lenders, escrow providers, and other advisors.

How Much Do Business Brokers Charge: Contributing Factors

Not every business pays the same brokerage fees. In the question of how much do brokers charge to sell a business, the answer depends on many factors. Understanding these factors well can help you evaluate proposals and negotiate a fair engagement more easily.

Size of the Business

This is perhaps the biggest factor affecting brokerage fees and commissions. Generally speaking, small and lower-middle-market businesses command higher commission percentages. This is because they require a similar amount of work as larger transactions, while generating lower overall fees.

As the value of the deal goes up, percentage-based commissions come down through tiered fee structures.

Business Type	Annual Revenue	Typical Fee Structure
Small/Main Street Business	Up to $2,000,000	Flat 10% commission (minimum applies)
Upper Main Street Business	$2 million to $10 million	8% to 10% commission
Lower-Middle-Market	$10 million to $100 million	10% → 6%
Mid-Market Business	$100 million to $500 million	10% → 2%; or flat 4%
Upper-Mid-Market	$500 million to $1 billion	Negotiated (often 2% to 4%)
Enterprise/Large Business	$1 billion and above	Customer negotiated fees (often 1% to 2%)

Every transaction is unique, but larger deals benefit from lower commission percentages because of their higher overall transaction values.

Industry Type

Businesses operating in attractive sectors with strong buyer demand, such as manufacturing, healthcare, industrial services, software, or business services, may be easier to market than businesses operating in declining or highly regulated industries. The need for additional marketing efforts, buyer education, and due diligence can all influence the overall fee structure of the broker.

The Broker’s Experience

An experienced advisor with a strong track record, industry expertise, and an established buyer network may charge higher fees than a less experienced broker. The experienced brokers justify their fees by attracting more qualified buyers, creating competitive bidding environments, and negotiating stronger purchase terms.

Negotiability of the Fees

Most business broker commissions are negotiable to some degree. Owners of businesses with strong financial performance, recurring revenue, or significant buyer interest may have greater leverage when negotiating fee structures.

While the exact negotiability varies from transaction to transaction, sellers may be able to negotiate lower success fee percentages, reduced upfront retainers, lower minimum fees, tiered commission structures, and other performance-based incentives.

What is the Business Broker Commission?

The business broker commission rate is a percentage of the transaction value paid to the broker after the successful sale of a business. The rate often depends on both the anticipated transaction proceeds and a successful sale process. If the total proceeds in a successful business sale are less than $1,000,000, the commission could be 10% or more of the total sale price. Unlike retainers or minimum fees, the commission is typically contingent upon closing, meaning the broker will be compensated only if the transaction is completed.

Alternative to Using a Business Broker

Not all businesses need a broker to find the right buyer. If you have a strong network, a desirable business model, or have interest from strategic acquirers, you can sell your business without hiring a broker.

If you want to sell your business on your own, here are a few tips to help you with the process:

• Leverage your personal and industry connections
• Quietly test interest with suppliers, customers, or even competitors
• List the business on curated M&A platforms
• Reach out directly to private investment firms or buyer groups aligned with your industry
• Work directly with legal and financial advisors to structure and negotiate the transaction

While selling your business independently can reduce transaction costs, it also requires significant time, planning, and negotiation experience. Without a structured sale process, you may end up receiving fewer offers, having less negotiation leverage, or even overlooking important legal and financial details.

Should You Hire a Broker If a Buyer Reaches Out to You?

Getting an unsolicited offer is great, but it doesn’t automatically mean you should or shouldn’t hire a broker. Hiring a sell-side advisor in response to such an offer could facilitate a smooth exit, or it could just muddy the waters.

If you’ve already found a serious buyer, paying a brokerage commission simply to facilitate the transaction may not provide enough value. On the other hand, if you’ve never dealt in these matters before, proper guidance can help you avoid costly mistakes during negotiations, due diligence, and closing.

Before deciding whether to engage a broker, ask yourself these questions:

• Do you understand the current market value of your business?
• Are you comfortable negotiating the deal yourself?
• Can you manage due diligence requests without disrupting daily operations?
• Do you have experienced legal and tax advisors to help you?

For more insights on how to sell a business yourself, check out our detailed guide on the topic.

Business Brokers vs M&A Advisors

Although the terms are often used interchangeably, business brokers and M&A advisors typically serve different types of businesses and transactions.

Business Broker	M&A Advisor
Serves small businesses and lower middle-market companies	Advises larger lower middle-market and middle-market businesses
Focuses on connecting buyers and sellers	Provides comprehensive transaction strategy and execution
Generally uses standardized commission structures	Frequently negotiates customized fee arrangements
Markets businesses to individual buyers, entrepreneurs, and smaller investment groups	Targets higher-value buyers, private equity firms, and even the government.
Best suited for less complex transactions	Better suited for larger and more sophisticated transactions

Understanding these differences helps ensure you’re working with the right advisor according to the needs of your business, rather than making a choice based on cost alone.

The Third Option: A Private Investor

Many business owners assume they only have two choices: hire a broker or sell directly to the buyer. There is also a third option that often flies under the radar: a private investment firm.

Private investors can provide the financial resources and transactional expertise of institutional buyers, while taking a more collaborative, long-term approach to acquisitions.

For owners who value their company’s legacy, employees, and continued survival and growth, joining hands with a private equity firm can offer advantages beyond simply closing the highest purchase bid.

Private equity buyers like 1719 Partners offer an attractive alternative to both traditional brokers and strategic buyers. We partner with owners of specialized manufacturing, value-added distribution, and industrial services businesses.

What makes us different?

• We have the capital and experience of private equity, without the sharp elbows
• We prioritize legacy, employees, and long-term success, not quick flips
• We can work directly with owners, streamlining the deal process and eliminating the need for a broker.

Let’s Talk

Interested in seeing if 1719 Partners is the right fit for you and your business? We’d be happy to discuss your business, your goals, and how we fit into the next chapter of your growth journey.

Send us a message here.

 

Frequently Asked Questions (FAQs)

Who pays the business broker fees?

In most transactions, the seller pays the broker fees. The fee is usually deducted from the sales proceeds at closing, although the exact payment terms are enforced as per the broker agreement.

What is the average fee for a business broker?

The average brokerage ranges from 5% to 15% for smaller businesses. Large transactions often require tiered commission structures, such as the Lehman Formula, resulting in lower percentage-based fees.

How can I tell whether a broker’s fee is reasonable for my business?

Compare the fee with the broker’s experience, services, transaction history, and buyer network. A reasonable broker fee should reflect the value they can deliver through the sales process.

What do small business brokers charge?

Small business broker fees typically range from 8% to 15% of the final sale price. Some brokers may also charge an upfront retainer or minimum fee depending on the engagement.

Is a success fee better than a fixed-fee arrangement when selling a business?

A success fee aligns the broker’s compensation with successfully closing the transaction, making it the preferred option for most sellers. Fixed fees are better suited for standalone services like valuations or consulting.

What should I look for in a broker agreement before committing to a fee structure?

Review the commission structure, retainer, minimum fees, exclusivity period, contract length, termination terms, and included services before signing on the dotted line. Understanding the agreement properly upfront helps avoid unexpected costs later.

Can a broker still earn a commission if I find the buyer myself?

It depends. If you don’t involve a broker in the process from the beginning, there’s no question of a commission. However, if you’ve signed with a broker and then make the sale yourself, many agreements include protection clauses that allow the broker to earn a commission if the sale closes during the engagement period, even if you introduced the buyer.

Are broker fees calculated on the total transaction value or only the cash received at closing?

It depends on the agreement. Some broker fees are based on the total transaction value, while others are calculated only on the cash received at closing.

What happens if my business doesn’t sell after paying a retainer or marketing fee?

Most retainers are non-refundable because they cover the work that has already been completed (valuation, listing, negotiations). Before hiring a broker, ask whether the retainer is credited towards the final commission if the sale closes.

How do I find business brokers near me?

A quick Google search can help you discover business brokers near you. Why may a business broker near me be preferred over a non-local one? Local business brokers have expertise that may help find the perfect local buyer and a higher closing price. And for a buyer that’s not local, a local business broker is able to explain to a non-local buyer what makes the area so marketable, ultimately making your business more appealing.

We have mentioned that long-term investments generate superior returns, but just how much higher are these returns? This is what we wanted to find out, so we created a simple model which shows that long-term investment returns are significantly higher when compared to a standard private equity hold. 

Read on to understand our methodology.

The Assumptions

First we had to set timelines for both the long-term hold and the standard hold periods. We set the true long-term hold timeline at 25 years and the standard hold at 5 years. Investors would pay a federal capital gains tax of 20% at the exit. We also set the state capital gains tax at 6%, although current state capital gains tax rates vary from 0 to 14.4%. 

For the traditional exit strategy, we set a timeline of 5 years per investment. While hold periods can vary, this is a pretty typical private equity investment horizon. For the shorter hold period, the investor has the same capital gains tax rates as for the longer period. To make the hold periods most comparable, we made the original investment and annual rate of return the same for each: $1 million and 12%. 

While the long hold had one investment for the 25 year period, the shorter strategy made five different investments in the same time period. This way, both strategies remained fully invested for the same amount of time.

The table below summarizes the assumptions.

The Results

The only difference between the two scenarios were the hold times. But, due to this difference, the traditional exit strategy paid capital gains taxes five separate times vs. only paying one time for the longer hold period. Each time taxes were paid, the net after-tax proceeds were reinvested. Losing the benefit of compounding returns from the amount paid in taxes, over time, significantly reduced the total gain for the shorter term strategy. The traditional strategy’s net after tax gain was $9.5 million vs. $12.9 million for the long-term strategy.  Despite paying $1.1 million more in total taxes, the long-term strategy generated about $3.5 million additional long-term after-tax proceeds. This is truly a dramatic outcome which highlights and reiterates the financial benefit of long-term holds.

Caveats and Other Considerations

Obviously we don’t live in a perfect world and annual rates of return, tax rates, etc. will all vary over time. Changing the rate of return has a significant impact on the outcomes.  Higher rates of return amplify the results and lower rates of return reduce the difference between the two models. For illustrative purposes, Increasing the annual rate of return to 15% from 12% generates an additional $5 million of after-tax proceeds for the long-term hold strategy!

This scenario simply looks at the numbers. It assumes the longer investment time period changes nothing but the hold duration. However, in practice, there are other ideas to consider: For example you may want to sell earlier if your investment is not generating the desired rates of return and you think you can redeploy the investment into a higher return asset. Or perhaps capital gains taxes are eliminated or greatly reduced in the future which makes selling and reinvesting less expensive. 

See the tables below for a closer look.

If you have any questions about this model or are curious about other benefits of a long-term hold, please contact us.