Using Business Broker In the Franchising Industry for Franchise Sales

Franchising companies often use Business Broker to help attain sales goals. Here is an interesting fact. Most large Business Broker Chains promote franchises and charge franchises money to join their network and programs. Not chump change either. Then the Broker Network takes all the logos and prominently displays them in ads and websites, and titles, meta tags and key words those pages. So as to attract customers, franchise buyers. But when a franchise buyer calls up, they are sent to the local business broker who secretly hates franchises?

Why? Low success rate? No, high success rates, the broker cannot resell it in the future when it goes South, because it never does. Then he cannot get money to appraise it and put it back on the market and sell it again. In many places the same broker sells the same small business or company over and over again. Yep. That’s right, who wins? The business broker’s buddies in the Community Service Club, the attorney helping the deal along, the accountants doing the books and of course the broker who has an appraisal certificate and of course the appraisals happen to come out where? At the exact price for a quick sale and fat commission.

How fat? Fat enough for the FTC to regulate the pills and ads of such that the broker takes. $20,000 plus. But the broker will say it is hard work? Really? Selling the same company twice, three even sometimes four times is hard work? BS. But of course with franchises, the franchise fee is used to help offset costs from the franchisor’s administration costs so normally the broker can only get $10,000 to 15,000 commission. Gee Whiz whose business is he going to push first? The one with the highest commission, just like a stock broker or financial planner tries to sell insurance annuities first, the commissions are much higher, why, because they are not as good and are harder to sell?

The Business Brokers, they are on their own team, not the buyer who they swear to help or the business seller who they listed the business. Nope, and then there is the franchisor. He/She has given them use of their brand name to use on a website and they take that and use that Federal trademark to attract buyers and then switch the buyer to a higher commission. And what about the franchisors who are only willing to pay a reasonable sum such as $4,000-$6,000 commission (actually finders fee) on a $20,000 franchise fee? Well those good franchisors businesses never get promoted and never get sold, yet they are being the most true to their team and systems by keeping commissions low and saving money to in turn better their franchise system. So the business brokers charge the franchisors lots of money, bait and switch call ins for a particular franchise for a dry cleaners or a car wash or something they can turn a huge commission and quick buck on.

And they can give earnings claims since they are simply a finders fee player, if you do not believe this happens check out a recent FTC opinion on business brokers. Then the business brokers knowing the tough nature of the franchising industry tell buyers that the franchises are no good and to ask how much income the buyer will make and if the franchisor cannot answer don’t buy it. But in franchising we have laws about earnings claims where as business brokers do not. They have accounting and books to show the buyers of businesses who come into the business brokers offices.

But alas, everyone knows when the original owners of a business leave the volume drops a minimum of 20% because the new owner is not a familiar face, thus the old customers start shopping around and the excuse is they have no loyalty to the new buyer, since they always did business with Bob or Sam or the Smith family, you see? It gets worse the business brokers have a disclaimer that says when you buy a business that you realize they are not liable for any information given to you during the sale? Interesting since they are the appraisers, know the history, tell you that the franchisors are not to be trusted since they do not for the most part give comprehensive sets of earnings claims. Why? Due to lawyers and lawsuits and in adequate and unverifiable data and loss of proprietary information in disclosures.

So the business brokers use this fact to entice franchisors to list with them take their money knowing franchisors have to sell with their hands tied behind their backs then use their band name to attract buyers, then bait and switch the customers and have them sign a form stating the information might be here say (standard in the industry) check it out, and then to top it all off sell someone something that will not work and then in a year or two it is back on the market with guess who? The same broker.

I once had a discussion with some lawyers on the ABA Forum for Franchising discussing brokers and even they were unaware of this problem. You know more franchisors should be smarter and look into this. The FTC should not allow business brokers to do things that franchisors cannot. Actually they should let both do what the brokers do, but all should be truthful when doing so. Too many laws, too many loop holes, not enough jobs, not enough sales to build systems fast enough to build the economies of scale to compete with the Wal-Marts of the world. Franchising could deliver that level of fierce market competition regionally with economies of scale buying power and team work while giving back to the communities they serve and keeping the money local, but not with over regulation state by state and the inconsistencies in Canada, and with the FTC. We are allowing bad policies to dictate loopholes and never leveling the playing field, which shouldn’t have been titled in the first place. How can every one not see what is so obvious. The business brokers are using extortion to get franchisors to sign up, because they can play by different rules. It would be like playing a chess match when the opponent has two queens, Yes if you are smart you can beat them, but not often. No one knows how to deal with this problem I have stated. But I do.

Dust the over burdensome regulation and you will not find everyone trying to go around them. We are not helping consumers we are killing franchise systems and killing the franchisees (also consumer) and franchisors already out there trying to build back the job base, which is just over 2/3 of all people employed are employed by small businesses. You know the franchising model is a perfect way to build efficiency into the small businesses of the future so that they can compete with global products produced for less money and with big box stores supplying consumers with everything but giving little back to help the communities (in most cases). I hope this commentary was thought provoking, if you have any questions about it, go find out for yourself. I have had much experience with this and I know what is going on.

Surely, someone in the government regulatory area has a clue? Well, maybe not so surely, but maybe one? I bet nothing ever happens over this issue. So you consumers should stay heads up and if you call a business broker because they say they represent a franchise system, you may want to call that franchise system directly if the broker starts trying to coax you into a non-franchise business, especially one which has had more than one owner over the years. Franchising works and there is a reason, it will continue to work as long as it is not killed like so many other industries in America. Look at the devastation out there being caused by horrible policy by the frivolous lawsuits by government regulatory bodies.

To find out which business brokers are the most ethical and which business brokers the top franchises use go to; [http://www.Franchising.org].

Prior to 1985, the SEC did not consider the sale of a business structured as a stock sale to be a sale of securities under the securities laws. This was known as the Sale of Business Doctrine. As a result, the penalties and rules that apply to securities sales did not apply to the sale of a business, and business brokers and merger and acquisition brokers were able to receive commissions in connections with those sales without being registered as a broker dealer. This changed in 1985 when the Supreme Court of the United States took the position that the sale of a business structured as a stock sale was indeed the sale of securities. As a result, business brokers and merger and acquisition brokers were prohibited from earning commissions in connection with those sales unless they were registered as a broker dealer. This created substantial implications for business brokers and mergers and acquisition brokers, especially where a transaction started out structured as a sale of assets and then during the course of negotiations, the transaction was restructured to be a sale of stock. In that case, business brokers and merger and acquisition brokers that were not registered as broker dealers were theoretically prohibited from earning a commission, simply because the structure of the transaction had changed. This result was often thought of as unfair in the industry.

The ABA task force on private placement broker dealers noted in its year 2000 final report that the broker dealer registration process involved significant costs as well as a regulatory model that is not the right size to accommodate the particular role played by business brokers in connection with the sale of a business. The requirement to register as a broker dealer is a lengthy process and there are substantial costs and fees, together with start up and first year expenses, including legal, accounting, and operating costs that can equal several hundred thousand dollars. Persons effecting one or several transactions a year simply cannot bear this financial burden. These firms do not hold customer funds or securities and generally they merely introduce the parties to one another and transmit documents between the parties. They do not participate in structuring or negotiating these transactions or otherwise advise the parties. Both buyers and sellers in this type of transaction are typically represented by legal counsel who can assist with due diligence, draft the transactional documents and advise their clients on structure, tax considerations and contractual provisions and there are remedies, both contractual and by operation of law, that are available to the parties in these types of transactions.

On January 31, 2014, the SEC changed its mind about these matters and issued a long awaited no action letter permitting certain merger and acquisition brokers to receive commissions in connection with the sale of a business even where the sale is structured as a stock sale.

Under the new interpretation, merger and acquisition brokers are permitted to facilitate acquisitions, mergers, business sales, and business combinations on behalf of buyers and sellers of privately-held companies and receive commissions in connection with the transaction. Moreover, the letter does not limit the amount or type of compensation that a merger and acquisition broker may receive, and it does not limit the size of the privately-held company. The letter also permits merger and acquisition brokers to advertise the sale of a privately-held company and include in such advertisements a description, general location and price range of the business.

For purposes of this letter ruling, a privately-held company is one that does not have any class of securities registered or required to be registered with the SEC under Section 12 of The Exchange Act or to which it is required to file periodic reports under Section 15(d) of The Exchange Act. Also the company must be a going concern and not a shell company.

As is so often the case in these matters, there is a catch. In this case, the catch is that the relief available under this no action letter is only available if the transaction satisfies ten (10) very specific conditions.

Those conditions are as follows:

1. The “merger and acquisition broker” must not have the ability to bind a party to a merger and acquisition transaction. A “mergers and acquisition broker” for the purpose of the letter is a person engaged in the business of effecting the securities transaction solely in connection with the transfer of ownership and control of a privately-held company through the purchase, sale, exchange, issuance, repurchase, or redemption of, or business combination involving securities or assets of the company, to a buyer that will actively operate the company or the business with the assets of the acquired company.

2. The merger and acquisition broker must not directly or indirectly through any of its affiliates provide financing for the merger and acquisition transaction. The merger and acquisition broker may assist the purchaser in obtaining financing from an unaffiliated third party but they must comply with all applicable legal requirements and disclose to their client, in writing, the receipt of any compensation in connection with the financing.

3. The mergers and acquisition broker is prohibited from having custody, control or possession of or otherwise handling funds or securities issued or exchanged in connection with the merger and acquisition transaction or other securities transactions for the account of others. The merger and acquisition transaction cannot involve a public offering. Any offering of securities must be conducted in compliance with an applicable exemption from registration.

4. No party to a merger and acquisition transaction may be a shell company, other than a business combination related company.

5. If a merger and acquisition broker represents both the buyer and the seller in a transaction it must provide clear written disclosure of the potential conflict to the parties it represents and it must obtain written consent from both parties to the joint representation.

6. A merger and acquisition broker may only facilitate a merger and acquisition transaction with a group of buyers if the group is formed without the assistance of the merger and acquisition broker.

7. Buyers or a group of buyers in a merger and acquisition transaction must control and actively operate the business acquired with the assets of that business. In this regard, control will be considered to be achieved if the buyers have the power directly or indirectly to manage the company or the policies of the company through ownership of securities by contract or otherwise. Under the view of the SEC, a buyer could be considered to actively operate an acquired company simply by possessing the power to elect executive officers and approve annual budgets or by service as an executive or other executive manager, among other things. The necessary control will be presumed if at the completion of the transaction the buyer or group of buyers has the right to vote 25% or more of the class of voting securities; has the power to sell or direct the sale of 25% or more of a class of voting securities; or in the case of a partnership or limited liability company has the right to receive, upon dissolution 25% or more of the proceeds from the dissolution, or has contributed 5% or more of the capital to the transaction. In addition, the buyer or a group of buyers must actively operate the company or the business acquired with the assets of the company.

8. No merger and acquisition transaction can result in the transfer of interests to a passive buyer or a group of passive buyers.

9. Any securities received by the buyer in the merger and acquisition transaction will be restricted securities within the meaning of Rule 144(a)(3) of The Securities Act.

10. A merger and acquisition broker must meet the following conditions:

(a) The broker has not been barred from association with a broker dealer by the SEC or any state or self-regulatory organization.

(b) The broker must not be suspended from association with a broker dealer.

These rules make very clear who will be entitled to the exemption provided in the no action letter. As a result of these changes, business brokers and merger and acquisition brokers will no longer have to worry whether or not they will be able to receive their commission in the event that a transaction is ultimately cast as a stock purchase. The SEC’s actions in this instance are grounded in an understanding of the realities of the typical sale of business transaction. The truth is that those transactions are structured on the basis of accounting or tax considerations, and not on the application of federal securities laws. The sale of a business between sellers and buyers of privately-owned companies are qualitatively different in virtually every respect from traditional retail or institutional brokerage transactions.

We are encouraged that the SEC recognized these distinctions. This decision will clarify a tricky area of the law and provide appropriate relief to business brokers and mergers and acquisition brokers who work in this area.

7 Benefits of American Business Brokers

Nobody has to tell you that these are pretty volatile economic times and if you’re contemplating buying or selling a business you are going to be facing some serious challenges. American business brokers have been doing a brisk business over the past two years thanks to a banking collapse and a stock market that no longer appears to be a prudent place to invest. Some businesses have to sell and others have cash that they can’t profitably invest elsewhere so they invest in growth. Business brokers are the professionals in the middle that make it happen for both the buyer and the seller. Here’s a short list of their services.

1. Preparing a business to sell

If you feel it’s time to sell your business a broker can help you put together the best look and then market your business professionally. When you’re selling you should be focusing on what you do best, running the business and making it as attractive as possible, and not be distracted with all the minutiae involved in selling a business. Leave that to the broker.

2. Valuation service

Arriving at a real market value for a business is obviously important to both a buyer and a seller and a professional broker can provide that service. In a sales transaction, the ultimate value of a business is what a buyer is willing to pay. However there are other times when an owner may want a certified value to satisfy estate planning, marital or partnership issues or when facing litigation. Once again the business broker is the pro you can turn to.

3. Closing

As hard and as complicated as it is to market and then negotiate a price, closing can be even more difficult because more people and organizations are involved. A business broker can handle much of the coordination that is required. He or she will have to deal with two sets of attorneys, accountants, possibly two or more banks, government agencies and vendors. This is a critical step and not the time to start learning by on the job training. Let a broker do it.

4. Exit strategy

The time to think about an exit strategy is before you put your business on the market. Discuss with your broker just what you want to do, retire or move on to another opportunity. This will actually have an impact on the method of payout. Many times you can get a more profitable deal if you agree to manage the business for a short time after the sale. There’s also the question of relationships with clients, vendors and employees. A broker can assist you in a strategy that leaves everybody feeling good.

5. Support services

Many brokers will work in partnership with support services such as legal and accounting. Some even work in conjunction with lending or funding sources as well. As a general rule, it is probably less expensive to contract directly with the services but if you don’t have a relationship with one or more already, then the broker is a good bet.

6. Up to date market intelligence

In a sense, business brokers work much like realtors, listing businesses and presenting the relevant facts. Brokers have the latest intelligence on a given industry in a given geographical area which can prove to be invaluable for either a buyer or a seller. And there are other market concerns that they stay current with as well. Perhaps one of the biggest changes for small businesses is in the area of financing a buy. With the banks as tight as they are, it is not uncommon for the seller to provide some or all of the financing.

7. Peace of mind

Buying or selling a business is a complex task and having a broker can assure the buyer or the seller that the transaction was fair, completed legally and save a considerable amount of time. Full time brokers make their living doing this, are professionals and render both the buyer and seller a real service of value.

The first step that a wise buyer or seller makes is to contact a professional business broker.