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How to Buy a Business: Those danged broker commissions

Over the last six hours or so, I have come across three different posts on buying a business where someone either asked or insisted that the seller pay the broker’s commission.

Now does the seller really pay the broker’s commissions?

Or is it someone else?

As with most things in life, to arrive at the truth you simply follow the money.

So, how does the money flow in a business sale?

On closing day the buyer cuts a big check and gives it to seller.

The seller then cuts a check for the broker’s commission.*

So, who really pays for the broker’s commission?

* Technically speaking, an escrow agent takes the buyer’s check and cuts smaller checks for seller, broker, and himself, but I left that detail out so as not to muddy the waters.

The Coming Boom

I’ve already made mention of this emerging trend in my post on the next Gold Rush. While this NYT piece focuses on middle-market M&A, rest assured that there’s also going to be activity at the lower end of the markets–which is where we focus. Mr. Roberts predicts that the resurgence of deal-making will begin within the next six months to a year as the economy improves and the middle-market mergers-and-acquisitions cycle pulls out of its current contraction.

This time, though, in his view, the recovery will get extra thrust from the convergence of four other trends: burnout in the ranks of baby-boomer business owners, rapid technology advances that are driving market consolidation, long-term growth in the appetite of foreigners for United States companies and a buildup of cash at the nation’s 4,000 to 8,000 private equity groups.

“There is tremendous, pent-up demand on both the buy and sell side,”
he said. “These middle-market firms account for two-thirds of gross national product. And they aren’t going anywhere.”

Mr. Roberts, the investment banker, says baby boomer burnout will be a driving force in the M.& A. boom that he sees on the horizon. Of the 1.2 million middle-market businesses, more than 800,000, with a total market value of $3 trillion, are owned by people born in the years 1946 through 1964, he calculates. He estimates they will sell or leave to heirs 560,000 companies with a value of $2.5 trillion, and shut down or otherwise dispose of the others.

The process has already begun, as some of the owners retire, become sick or disabled or find a sudden need for cash. “Those entrepreneurial fires can die more quickly than you’d think,” Mr. Roberts said. “One day you’re suddenly tired.” (source)