8/14/2019 Reasons to Use a Reputable Business Broker

http://slidepdf.com/reader/full/reasons-to-use-a-reputable-business-broker 1/2

Reasons to Use a Reputable Business BrokerThe thesis of this article is that the

use of a reputable intermediary

(business broker) adds value on an ex-

ante basis by increasing both the

likelihood of a successful outcome and

the amount of the anticipated payout in

the purchase or sale of a business.Intermediary selection is critical as

the quality and capabilities are highly

variable within the profession. At the

most basic level, the intermediary

should be properly licensed and

insured. The International Business

Brokers Association ("IBBA") is the

  preeminent industry group. They offer 

two levels of accreditation (Certified

Business Intermediary and Merger &

Acquisition Master Intermediary).

IBBA membership and accreditation

are strong positive indicators of a

reputable broker. Additionally, the

  buyer or seller should ask for, and

follow-up with, references for the

 broker..

How might one measure success?

Risk and reward are relevant metrics to

apply. Since we are dealing in capital

markets, it is appropriate to apply

financial definitions to these terms. In

the world of finance, risk is

qualitatively described as the reliability

of future outcomes. Quantitatively, it ismeasured in standard deviation units.

U.S Treasury notes are considered risk 

free and would have a standard

deviation of zero as future payment is

certain. Other investments that present

a greater risk would have a greater 

standard deviation.

Anticipated reward as a financial

term is often expressed as Net Present

Value ("NPV"). Future payments are

discounted to reflect both the perceived

  payment risk and timing of payments.

For those readers with an interest inmathematics:

NPV =Σ pi / (1 + r)i

where p is the payment in period

(i) and r is the required return or 

interest rate. Value is an inverse

function of both risk and time to

  payment. The NPV calculation is

widely used and understood. The

  problem with using the methodology

lies in determining an appropriate value

for r.

Another more sophisticated

methodology of quantifying reward

 prior to the deal is in terms of ExpectedMonetary Value (EMV). Using this

methodology, a decision tree is drawn

for the various potential outcomes. The

forecast payouts are then multiplied by

the forecast probabilities to calculate an

EMV. For example, a $1 bet on red in

roulette, which has a possible payout of 

$2 and a risk probability of success of 

18/38, has an EMV of just less than 95

cents ($2*(18/38)) + ($0 *(20/38)). A

$1 bet on a single number, which has a

  possible payout of $36 and a risk 

  probability of success of 1/38, has the

same EMV of 95 cents ($36*(1/38) +

($0*(1/38)) but a dramatically higher 

risk. Red is therefore a better bet as it

has the same EMV but lower risk. The

time value of money concept embodied

in the NPV calculation can be overlaid

as required onto EMV using a risk-free

rate of return for r.

Risk 

Let’s begin applying these lessons

to our thesis that a reputable broker adds value. Although risk and reward

are inextricably intertwined, let’s start

with risk. The Hippocratic Oath states:

"first do no harm." One risk in the sales

  process is that sellers may harm

themselves by following a natural

tendency to not disclose adverse

information upfront in the business

sales process. Such information will

eventually come to light in the due

diligence process or after the sale and

  potentially either derail the deal pre-

sale or raise the specter of litigation  post-sale. To limit risk due to

inadequate disclosure, the intermediary

will coach the owner to disclose,

disclose, disclose.

Another risk is that a business can

  be harmed by breaches in

confidentiality. For example, a buyer 

may have competitive motives and no

true interest in purchasing a business.

For this reason a reputable business

  broker will protect his seller client by

requiring a potential buyer to sign a

nondisclosure or confidentiality

agreement. In managing risk, an

intermediary is well positioned to

screen unqualified buyers and obtainsignatures on confident ial i ty

agreements with teeth. The broker wil

also advise the owners of the risk

inherent in marketing to direc

competitors. In each engagement, a

reputable broker will parse out the

relevant information commensurate

with the buyer’s demonstrated level o

commitment. These actions will reduce

the chance of having the sale process

damage the value of the business.

As we saw in the roulette example

one should consider the ex-ante

  probabilities of achieving the variou

outcomes. Most small businesses tha

are listed for sale do not sell(1)

Unrealistic price expectations are the

most common issue. A business

  broker’s market knowledge shou

inject realism while concurrently

enhancing the perception of the firm’s

value and marketability.

The ideal valuation process is

where the broker collects and presents

the relevant information about a firm toan accredited third-party appraiser. The

  broker knows what drives value an

their involvement will provide a

  justifiable higher price. Use of a

accredited third-party appraiser lends

credibility to the process and provides

the client with comfort that the correc

 price is being placed on the business.

Two other reasons why listed

  businesses do not sell are a business

failure to attract buyers and lack of

financing for the buyer. A broker’s

  position in the marketplace provideconstant interaction with buyers and an

experienced broker knows how to bes

market a business. With respect to

financing, a reputable broker will also

  be aligned with several lenders. Th

  broker will obtain pre-appro

requirements from lenders before going

to market and qualify buyers based

upon banking requirements.

Published in the Journal of the DuPage County Bar Association

  J o s e p h A s s o c i a t e s I n t e r n a t i o n a l , I n c . - B u s i n e s s B r o k e r s

1 4 1 W . J a c k s o n B l v d . S u i t e 3 4 2 0 C h i c a g o , I L 6 0 6 0 4 • T e l e p h o n e : 3 1 2 . 2 1 2 . 8 0 4 6 • F a x : 6 3 0 . 3 5 5 . 6 1 9 1 •

w w w . B r o k e r C h i c a g o . c o m

   J  a  n  u

  a  r  y

   2   0   0   7

8/14/2019 Reasons to Use a Reputable Business Broker

http://slidepdf.com/reader/full/reasons-to-use-a-reputable-business-broker 2/2

Trust and communication between

the parties and the broker are critical.

Once engaged with a serious buyer, a

good broker will maintain continuous

contact with both sides. An attorney,

who is limited by ethical rules from

communicating with a party

represented by another attorney, does

not have this same freedom of 

communication. The intermediary canmanage expectations on both sides

while coaching and directing the parties

through the sale process. This reduces

the risk of a surprise and reduces

anxiety induced by lack of process

knowledge. The buyer and seller’s

  personal relationship must survive the

sale process. An intermediary provides

a buffer zone that will be tested during

negotiation and due diligence.

Deals that drag are deals that die.

A fully documented offering

memorandum will speed the buyer’squest for financing. A good broker will

have thoroughly prepared the seller for 

due diligence and the information

needed by the buyer. This should

eliminate deal-killing surprises and

keep things moving. The broker will

also maintain regular communication

during due diligence with both parties’

attorneys and other advisors to

maintain deal momentum. If well

  prepared, the attorneys will likely

 borrow heavily from the broker’s work 

 product when drafting schedules for the

closing documents.

The consequences of not selling a

  business vary case by case. The EMV

for using a broker increases with the

level of seller compulsion to sell. The

reason is that the broker has better odds

of closing a deal and thereby avoiding

the negative outcome of not selling the

 business.

Reward

Let’s now focus on reward. Sellersare interested in maximizing post-tax

  proceeds with a strong bias for cash at

closing. They would like to have no

residual risk. Once again we see

conflicting goals. The all-cash stock 

sale will not command the same price

as an asset sale with some level of 

seller financing.

Deal structure strongly influences

value. An experienced broker can help

in the search for an optimum in

  balancing these objectives. Advisors

lacking M&A experience often

recommend against holding any debt

from the buyer as payment is not

assured. This sends a strong adverse

signal to both the buyer and their 

financing source. Banks are less likelyto lend and buyers are less likely to

 buy. The result is reduced marketability

and lower value. An experienced broker 

will point out that a seller note for ten

  percent of the transaction amount will

typically raise value by a comparable

amount while increasing marketability.

Any EMV assigned to the seller note

should therefore be welcomed as

additional proceeds. Clearly, the

  balance swings against the seller as

their portion of financing increases.

Business owners often look to their accountants to help them sell their 

 business. Most accounting firms do not

have a brokerage or investment banking

group and therefore lack the necessary

resources to effectively market a

 business. The accountants’ professional

organization (American Institute of 

Certified Public Accountants) offers an

accreditation in business valuation but

few accountants have earned these

designations.

The typical CPA is often put into a

difficult position when asked for an

opinion of value by their client. The

CPA is often reluctant to admit their 

  professional limitations. He may be

worried about digging too deeply into

reported discretionary expenses as this

might force them into recommending

that the client file an amended return.

There may also be a concern about

 preserving the client relationship. Even

if the accountant does a perfect job in

determining value, the accountants’

report may lack the credibility of athird-party accredited appraiser.

Summary

In summary, a reputable broker has

the means and motive to lower risk and

increase reward for the client. In so

doing, the EMV of their services should

more than offset their fees and provide

added value relative to the alternatives

of for-sale-by-owner or attempts to

market by other advisors such as

 bankers, accountants and attorneys.

One final word of caution: mos

attorneys focus only on reviewing the

intermediary’s listing or engagemen

agreement. This is a big mistake. An

attorney serves the client best by

helping find and engage the righ

 broker with the right listing agreementThe wrong broker with a grea

agreement will prove to be a lingering

disservice.

By Joseph McCaul

References:

1. Business Reference Guide, Tom

West, Business Brokers Press, 2005.

Joseph McCaul is the president and

founder of Joseph Associates

International, Inc., an Illinois registered business brokerage &

advisory firm focused on ownership

transfers of privately held business. Joe

McCaul holds an MBA from Case

Western Reserve University and

engineering degrees from the

Polytechnic University. He is a member

of the International Business Brokers

Association, World Trade Center of

Chicago and Naperville Area Chamber

of Commerce.

  J o s e p h A s s o c i a t e s I n t e r n a t i o n a l , I n c . - B u s i n e s s B r o k e r s

1 4 1 W . J a c k s o n B l v d . S u i t e 3 4 2 0 C h i c a g o , I L 6 0 6 0 4 • T e l e p h o n e : 3 1 2 . 2 1 2 . 8 0 4 6 • F a x : 6 3 0 . 3 5 5 . 6 1 9 1 •

w w w . B r o k e r C h i c a g o . c o m