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  • Professional Collaboration in the Sale of a Business

    Jun 12, 2018

    The three most common goals of an entrepreneur selling a business are traditionally to achieve the highest possible market value, mitigate post transaction risk, and to facilitate a transfer of ownership that is viewed as positive by employees, customers, and suppliers.  A goal NEVER on the list is to maximize compensation for the business broker facilitating the transaction or to compensate the intermediary if they do not perform and deliver a sale.  Business broker compensation, similar to legal & accounting professional adviser expense, is “a means to an end” cost that enhances the probability of achieving the three primary transaction goals.

    In real estate transactions, it is common for commission to be allocated to the professional that represents the seller and to the broker that represents the buyer.  100% of the commission is traditionally paid by the party selling the real estate at time of sale and is considered a transaction cost.

    Business brokerage transactions have a slightly different dynamic because entrepreneurs employ professionals from a spectrum of professional disciplines to assist with a business purchase & sale.  On the seller side of the transaction, a business sale intermediary is often employed to value, market, negotiate, and facilitate the business sale from listing to transfer of ownership.  Proper valuation of a business, achieving the best possible market terms in sale, and successfully facilitating the sale to timely closing requires experience, knowledge, and a high professional skill set.  Mergers & Acquisitions intermediaries with strong ethical compasses who have successfully facilitated dozens of deals personally are commonly regarded as some of the best problem solvers with multi-disciplinary knowledge in the professional world.  Attorneys & accountants generally welcome the opportunity to collaborate with them on transactions.

    Legal & accounting counsel are traditionally sought by both the seller and buyer in a business purchase & sale transaction resulting in both parties engaging lawyers and accountants to support their efforts.  This multi-disciplinary engagement of professionals builds a team on the buyer side of the table where it commonly becomes unnecessary for the buyer to engage a business acquisition intermediary to counterbalance the seller’s business broker.

    The reasons the intermediary becomes superfluous to achieving the buyer’s desired outcome is as follows:

    1. Many entrepreneurs desire to facilitate their acquisition negotiations on the business terms (e.g., price) directly.  Negotiation is both an art & science.  Secondary communication through an intermediary can diminish the ability of the buyer to make decisions and take action from a position of complete knowledge.

     

    1. Legal & liability issues are addressed by legal counsel in the transaction.   It is prudent for both the buyer & seller in a business purchase & sale transaction to have their attorneys review & negotiate all legal verbiage establishing a quality representation relationship for both parties.  Business brokers are generally not directly involved in these negotiations.

     

    1. Valuation, due diligence, and tax issues are addressed by accounting counsel in the transaction. It is prudent for both the buyer & seller in a business purchase & sale transaction to have their accountants assess business valuation, facilitate due diligence, and analyze the tax implications of the transaction establishing a quality representation relationship for both parties. Business brokers should not conduct due diligence for buyers or provide tax advice.

    Although it is common for entrepreneurs buying businesses to not engage an intermediary as part of their transaction team, there are situations where it is prudent to engage a business broker on the buyer’s side of the table.   I recently experienced one such situation, where a former executive at Starbucks engaged an experienced, knowledgeable business broker to assist with the acquisition of a privately held company represented for sale by IBA and it was commonly recognized the buyer’s business broker was an asset to the transaction.

    In this situation, like in all IBA representation projects, our client did not care what IBA received as compensation for successfully facilitating the sale.  Our client’s primary concerns were the sale price achieved in the marketplace, the mitigation of post transaction liability, and how customers & employees of the business would be treated post sale.  As is common in real estate, IBA shared the commission payable on sale of the business as specified in its representation agreement with the buyer’s broker in this transaction.   This may seem like standard practice, but entrepreneurs interested in selling their businesses with professional representation from a business broker should know that it is not.  Many business brokerage firms will not share commission with buyer’s brokers.  This practice is counterproductive to a business seller achieving a competitive marketplace for their business and the best possible sale price.  The goal in the professional sale of a business should be to maximize value for the client.  The only motivation for this practice is to maximize business brokerage commissions for an individual broker.  “Caveat Emptor” a business owner wishing to sell their privately held company or family business should know a business brokerage firm’s policy on co-brokerage prior to listing their business for sale.  A business brokerage firm that does not co-broker and share commissions might be able to find a quality buyer for their client’s business, but from a client’s perspective why would it make sense to eliminate a group of potential buyers, those represented by buyer’s brokers, from the pool of candidates interested in potentially buying a specific business, if the only justification for the policy is for the business brokerage firm to maximize its own profits.  The best business brokerage firms in the United States have their co-brokerage policies on their websites. The following is IBA’s:  https://ibainc.com/co-brokerage-program/

    IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.

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