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  • Performance Based Compensation in the Sale of a Business

    Jan 18, 2016

    The Seattle Times reported on January 12, 2016 that local restaurant entrepreneur, Tom Douglas, plans to increase the minimum wage paid to his employees to $15 per hour at all of his restaurants by March 31, 2016. He will also be assessing a 20% service charge on all customer bills in lieu of having the customer provide a tip at the end of the meal. The justification for this billing procedure modification was a preemptive effort to address the minimum wage legislation in place in the Seattle city limits and creating a more equitable balance between wage compensation to employees in the front & back of the restaurant. I applaud Mr. Douglas in his efforts to compensate his employees for their efforts at a higher level. My experiences at his restaurants has always been positive and I anticipate that the quality of the food and service provided will not be impacted by the decision based on the corporate culture he has established.

    The action is also an example of a trend in American society where performance based compensation is disappearing and being exchanged for payment systems that minimize financial risk to the employee and employer. The basic concept behind the tip provided to a waitperson is that the size of the tip is contingent on the quality of service & knowledge provided during a meal with a traditional range of 10 – 20% of the meal value being provided by the customer to their waitperson. Historically, the level of service & knowledge provided at upscale restaurants has exceeded family dining establishments with good wait staff often advancing through levels of restaurants during their careers resulting in increased compensation as knowledge & experience progress. This fundamental concept has resulted in a higher level of service & knowledge being provided to restaurant customers in the United States than in nations around the world where tipping for service is not a standard practice. I recently returned from Australia, a nation where tipping is not standard practice. It was our experience while in Australia, that the food was excellent, but the service was not up to American standards. It was our opinion that this was the case because the same financial incentive did not exist in both countries to provide excellent service. This observation is in light of the observation that the Australian people were generally some of the most helpful & friendly people my wife & I have experienced in our travels around the world.

    The professionals at IBA have also observed that it is increasingly common for business brokerage firms to charge evaluation fees, administrative fees, and retainers to clients up front to engage their services. We understand why firms employ this business model in an effort to provide a more consistent revenue stream to the business brokerage company and its affiliated brokers. However, we question whether this business model best serves the customer. IBA employs a paid for performance business model for our business brokerage services where 100% of our compensation is paid when a transaction is completed. This business model ensures that no client IBA represents in the sale of their business pays our firm unless they complete a transaction on satisfactory terms. Contrast this with a firm that charges for their business evaluation at the start of the representation process. The firm that charges for a business evaluation has a motivation to provide an answer that will result in a satisfied customer. In comparison, when IBA provides a client with an estimate of the “fair market” value of a business, it has an incentive to provide a value it can deliver in the marketplace while working in collaboration with its client to achieve the best possible sale price since both the client’s & IBA’s compensation is 100% tied to the sale price achieved in the transaction. It is prudent for all business owners looking to sell their companies to understand the business model employed by the firm they are hiring to generate revenue. IBA generated 97.5% of its revenue in 2015 from completed transactions. Selling privately held companies & family owned businesses is what our firm has done successfully for 41 years. We complete 80 – 90% of the projects we take on in the time frame first established between us & our clients when the project is started. We do not want representation projects we cannot complete. This motivation differs significantly from a firm that gets paid regardless of success in the sale of a business. IBA frequently is asked to take on business sale projects that other firms were unable to complete. In Q4 of 2015, we completed the sale of a company for $3,000,000 that was previously represented unsuccessfully by another firm. In Q1 2016, we were engaged by another client that was unhappy with the representation provided by another firm after spending a significant portion of 2015 on the market without receiving a satisfactory offer. A sale of this company is anticipated by the end of Q2.

    Performance based business models are some of the most difficult business models to implement successfully. Only the best & strongest survive when compensation is tied to performance. The next time you dine at a restaurant where the waiter is dependent on tips to earn their income or shop at Nordstrom where the salespeople provide legendary customer service because their income is dependent on it, I encourage you to recognize the effort expended on your behalf. When it is time to select a mergers & acquisitions professional to represent you in the sale of your business, I encourage you to select a party that will put their money where their mouth is and make compensation contingent on performance.

    IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media and the mergers & acquisitions community on confidentiality and any other subjects relevant to the purchase & sale of a business.

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