BUSINESS BROKERS



Business brokers act as intermediaries between buyers and sellers of a business. They may represent either party in the transaction, but do not take possession of goods or property, or deal on their own account. Brokers differ from dealers in that the latter transact on their own account and may have a vested interest in the transaction. Brokers fill the important marketing function of bringing buyers and sellers together and helping them negotiate mutually beneficial agreements. In addition, they facilitate transactions by providing expertise and advice.

Indeed, brokers supply numerous benefits to both buyers and sellers. For example, sellers benefit because they do not have to spend time and money searching for buyers. Qualified brokers have access to people who are in the market to purchase a company, or they know how to find legitimate prospects much more quickly than typical business owners. The broker may also be able to help the seller place an accurate value on his enterprise, devise a strategy to transfer ownership over time, and overcome legal hurdles related to taxes.

The buyer also benefits from the broker's access to business-buying and -selling channels. A buyer who goes to a broker may be able to find a business that suits his abilities, wants, and financial constraints much more quickly than he would working independently. The broker can help him determine what he can afford and, importantly, can help arrange financing from a lender or the company owner to purchase the business. He may even go to bat for the buyer at a bank or other lending institution, or walk the buyer through the details of the financing process. Finally, it is the broker's duty to ensure that the interests of the buyer (and the seller) are protected by any contracts or agreements relating to the sale.

For their services, brokers typically receive in compensation a percentage of the total value of the transaction. The fee may be paid by the buyer, seller, or both parties, depending on the nature of the transaction, but usually the expense falls on the seller. Commissions vary widely, usually depending on the size of the transaction and the amount of service provided by the broker. For a very small business, one with less than $500,000 in annual receipts, the commission may be as high as 10-15 percent. For multimillion-dollar transactions, the commission may be as little as 1 percent. For small business transactions, some brokers also require an up-front retainer of $5,000 or more.

INDUSTRY TRENDS

Demand for business-brokering services in the United States accelerated in the 1990s because of the strong U.S. economy and buyers' relatively easy access to capital. In the late 1990s there were around 3,000 business brokers in the United States. The leading professional organization, the International Business Brokers Association, represented approximately 760 of these firms. The largest brokerage system was VR Business Brokers, Newport Beach, California, a large network of franchised brokerages. According to statistics published by VR Business Brokers, the network's average business sale in 1998 took 174 days to complete, and the typical company being sold had $458,000 in annual sales. Some of the most common types of businesses sold via broker included florists, card and gift stores, prepared food and beverage retailers (coffee shops, restaurants, bars), and automotive services.

THE BROKERAGE PROCESS

Although it is a broker's chief function, bringing buyer and seller together is often the easiest part of his/her job. Indeed, actually closing the transaction is usually much more complicated than buying or selling a car, or even a house. The process is usually compounded by a number of factors that are unique to each situation. For instance, the seller of a business often has a sentimental attachment to his company. Therefore, the value he places on it may be greater than its actual worth. Likewise, a buyer may fail to appreciate the amount of work involved in building a business to a certain point. Other major factors that differentiate business brokering from other large transactions is financing, which can become very complicated, and problems related to employees and clients of the business being sold.

Once a business broker brings an interested buyer and seller together, the succeeding brokerage process can be broken down into a five-step process, described by Garai and Pravda in Mergers & Acquisitions, March/April 1994.

  1. In the first stage of the process, the broker attempts to set a target for completion of the transaction. This is usually accomplished by means of a letter of intent in which the buyer and seller agree to move toward a deal. This is important because it puts the deal into words and serves as a framework around which to structure negotiations. The letter also reduces ambiguity and misunderstanding, and ensures that both parties are serious about pursuing the transaction. Finally, establishing a deadline through a letter of intent helps to keep the buyer and seller focused on the big issues, rather than on minor details that can drag the deal out for months on end or even kill the sale.
  2. After setting a target, the broker must close price gaps that inevitably arise during the negotiation. A price gap is the difference between what the seller wants and what the buyer is willing to pay. This is especially problematic when the seller wants considerably more than the fair market value for the business; brokers must be acquainted with standard valuation methods and may need to educate the seller in order to complete the sale. Even after the buyer and seller agree on a price, discrepancies are likely to emerge when they sit down and begin working out the details of the plan. Differences of opinion may arise about the value of inventory or accounts receivable, for example, or one party may simply change his mind about the agreed-upon price. Oftentimes, tax issues come to light that change the way that each party views the deal. In such cases it is the broker's job to suggest a structure for the deal that will minimize tax burdens.
  3. The third stage in the brokerage process involves overcoming "seller's remorse." Seller's remorse commonly occurs during the latter stages of negotiations when the seller suddenly realizes that he is relinquishing control of the company in which he has invested part of his life. The seller may wonder what he will do the day after the sale without an office to go to and subordinates to direct and assist. Or she may be concerned the buyer will run the company into the ground, thus destroying the company she built. Seller's remorse can kill the deal if the broker fails to confront it early in the negotiations by assuaging the seller's particular fears or concerns. This can often be accomplished through acts as small as allowing the owner to keep a company car or country club membership, or by offering to retain him as a consultant for certain projects, etc.
  4. The fourth phase of the business-brokering process is due diligence, whereby various legal requirements are identified and addressed. These issues may range from accounting accuracy to intellectual property rights to undisclosed litigation or tax liabilities the company faces. For example, the buyer of a valve manufacturing firm might want to ensure that he was procuring the legal rights to all patents held by the firm, and that all of the patents were valid. Or, the potential owner would want to make sure that there were no "ticking bombs" of which he is unaware, such as hazardous waste sites that the company has been required by law to remedy. It is the broker's job to facilitate due diligence to protect parties on both sides of the deal.
  5. During the fifth stage, the purchase/sale agreement, the broker helps the buyer and seller iron out and sign a final contract. This stage is the one most likely to entail the use of attorneys on both sides, even for smaller transactions. The best way for the broker to reduce the chance that the deal will fail at this critical juncture is to try to address all questions and concerns in the letter-of-intent and due-diligence stages. Despite his best efforts, one or both parties may employ brinkmanship tactics that threaten to scrap the entire deal, such as significantly raising the asking price or demanding that some new contingency be added to the agreement. At this point, the broker's expertise as mediator and peacemaker is key.

SEE ALSO : Mergers and Acquisitions

FURTHER READING:

Garai, Gabor, and Susan Pravda. "The Critical Line Between Dealmakers and Deal Breakers." Mergers and Acquisitions, March/April 1994.

International Business Brokers Association. IBBA Journal, quarterly.

"Merger Matchmakers Are Starry-Eyed over Torrid Pace of Purchases." Dallas Morning News, 6 May 1998.

Murphy, H. Lee. "Deal of a Lifetime." Crain's Chicago Business, 8 June 1998.



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