Lovers and statesmen have found go-betweens useful -- and you can, too. They come with different labels: intermediaries, investment bankers, financial advisors, merger and acquisition consultants, brokers, finders, and others. I shall call them all brokers.

Indirect communications allow you to initiate contacts that might otherwise be difficult or awkward; they allow you to make tentative proposals; they allow you to mull over positions before responding; and a third party sometimes picks up signals that you miss. Most of all, brokers reach more prospective buyers than you would alone. Many buyers make acquisitions regularly and make their interests known to brokers. Brokers may offer guidance on price and other suggestions, but their most important function is to introduce you to qualified buyers -- in the plural. You can then choose among the buyers. Brokers' incentives drive them to take initiatives most people would not undertake on their own.

A QUIET TRANSACTION. A quiet transaction, without declaring the business for sale (and perhaps threatening its value), can be appealing. You like the idea of a deal with someone who knows what you have -- its value, its potential, and your stellar reputation. This party may be an acquaintance or someone introduced to you by your lawyer, banker, or brother-in-law. You meet for lunch. The suitor showers you with compliments, and the demeanor and conversation convey class. You are impressed. You would like to be associated with such people. The appeal of a quiet transaction grows on you. It would be civil. Wait. The suave appearance and smooth social graces may conceal a larcenous intent. To a buyer, a quiet transaction means no competitors.

Nothing inhibits a buyer from taking advantage of you better than an alternative suitor. Do you want to give a buyer the advantage of dealing with you without competition? Keep in mind that the buyer is only bound when a contract is signed -- months hence. When a seller deals exclusively with one buyer, the seller is more committed than the buyer.

BUYER PAYS THE BROKER. It sounds good: The broker is to be paid by the buyer. You provide some information and wait. A few weeks go by, and you hear that the buyer is not interested. Now the same broker has another prospective buyer to suggest, another company willing to pay the broker's fee. Why would these buyers be willing to pay such fees? It is because they want to review as many acquisition opportunities as possible. The broker's fee adds 2% to a $10 million deal, and valuations are not so precise that this makes a pivotal difference. The problem, for you, is that the broker must heed the buyer: the party paying the broker wants to keep the price down, exactly the opposite of your goal.

You take comfort, however, in the knowledge that the broker does not control the price. But a prime benefit of a broker is to create a competitive atmosphere for your suitors. When the buyer is paying the broker, there is less competition. This suits the buyer. A broker for a seller is always looking over a buyer's shoulder to seek a more appealing suitor. Not so the broker paid by the buyer. Some buyers require fee agreements that preclude the broker from introducing an alternative buyer for a specified time -- competition is the last thing a buyer wants. Buyer-paid brokers do initiate many transactions, but they do not share your goals.

So how much do these buyers pay brokers? Nine out of ten buyers agree (for transactions up to $50 million) to this formula: 5% of the first $1 million of the price, 4% of the second million, 3% of the third million, 2% of the fourth million, and 1% of the fifth million, and any balance (this is $150,000 for a $5 million transaction, and 1% of the balance). This is called the Lehman Formula. Variations occur. Some aggressive leveraged-buyout firms offer a $50,000 bonus, on top of the Lehman Formula, to encourage brokers to come to them first -- and usually this increment is conditional on the broker not showing the opportunity to anyone else for 60 days (broker fees are cheaper than price increases). For a $25 million transaction, the "Lehman" fee is $350,000 -- 1.4% of the total. Clearly, this has a minimal effect on the economics of the acquisition.

Many sellers choose to avoid a financial commitment to a broker and rely on buyer-paid brokers to introduce them to a series of suitors. This restricts their universe of buyers. Almost all leveraged-buyout firms agree to pay brokers for initiating acquisitions. So buyer-paid brokers can introduce a wide variety of such suitors. The large public companies are different: With notable exceptions, most do not pay brokers when they buy. They are presented with plenty of acquisition opportunities by agents for sellers, and they approach some target companies on their own. Rely on buyer-paid brokers, and you miss some important segments of the market.

Colin Gabriel (cgabriel@optonline.net) is a business broker in Westport, Conn.

Reprinted with permission from
How to Sell Your Business -- and get what you want!
by
Colin Gabriel
Copyright 1998, Colin Gabriel
Published by Gwent Press Inc., Westport, CT
Adapted with permission of the author and Gwent Press.
Title available from bookstores, online retailers, and by calling 1-800-964-1902
See Contents at
http://www.bookzone.com/bookzone/10001010.peek.html