By Erwin Krasnow, Garvey Schubert Barer
Intermediaries play a useful role in bringing prospective buyers together with station owners desiring to sell their station. They exist for a reason: a third party can say things to buyers and sellers that they could never say to each other. Even Alana “Honey Boo Boo” Allison, a very marketable personality, uses an agent! As in the real estate business, most broadcast acquisitions involve the services of brokers. However, unlike the real estate business, where multiple or open listings are common, media brokers usually have exclusive listings.
Brokers and investment bankers want to work with financially qualified buyers. Accordingly, it is important for prospective purchasers to “flash the cash” upon entry. Indeed, the prospective buyer’s primary task is to convince the intermediary that the buyer will be able to close the transaction. In recent years, investment bankers and some brokers also work on the “buy side” of a transaction and assist buyers in raising capital, although representing sellers continues to be the norm. On the buy side, brokers have a special feel for knowing what a particular station will sell for and sometimes can keep the prospective purchaser from overpaying.
What do brokers and investment bankers bring to the table for sellers? They provide several key functions that sellers cannot — and should not — do for themselves. First, they help the seller place a realistic value on the station, determine a selling strategy, and generate marketing materials. Most successful brokers have a time-tested process for selling a broadcast station, which includes the use of an on-line data room, a magnificent rolodex and uncanny sense of identifying prospective buyers both financially and strategically. Second, they find and qualify buyers who have the ability to close the deal and will keep the sale information confidential. Third, they become intermediaries between the seller and potential buyers in the complex negotiating dance, particularly at the stage leading up to choice of the buyer whose offer will be accepted. Brokers and investment bankers often act as a “buffer” when communications break down and emotions erupt. These tasks require industry and market knowledge, as well as marketing, selling and negotiating skills, including more than a little bit of diplomacy.
Negotiating the Commission Structure
Because the fee arrangements are not made public, a mythology exists concerning the fees paid to brokers and investment bankers. For many years, the industry norm has been a structure known as the “Lehman formula”: 5% of the first $1 million of the total sales price (including deferred compensation); 4% of the second million; 3% of the third million; 2% of the fourth million; and 1% of each additional million. The fees are normally paid at the closing. With respect to deals under $1 million, it is not uncommon for an intermediary to charge a higher percentage (e.g., 10%) or a fixed fee ($25,000 – $50,000). Some brokers use a “reverse Lehman” (1, 2, 3, 4, 5) as a way of giving them a greater incentive to obtain a higher sales price. In recent years, a number of larger firms charge 5% of the first $3 million; 2% between $3 million and $20 million; 1.5% between $20 and $50 million; and one percent, above $50 million. In transactions where the sales price is less than $1 million, a flat fee is common. Although not publicized, it is not uncommon for brokers and sellers to negotiate the fee formula.
Typical Provisions in a Listing Agreement
Brokers have developed standard Listing Agreements that serve as a starting point for negotiations. Here is a listing of common provisions:
* starting and ending dates; length of initial agreement; terms for renewal;
* agreement by broker to contact only those prospective buyers who have been pre-approved by seller;
* agreement by seller that, during the term, it will deal exclusively with broker and will not offer to sell the station to others;
* seller has the right to accept or reject offers for the station at its discretion as well as set the terms for the transaction; some agreements provide that if seller declines an offer by a ready, willing and able buyer meeting the price and terms, the commission is due if the seller turns down the offer.
* commission upon sale of substantially all of the stock or assets or where seller enters into a JSA or LMA with a party solicited by broker, usually commission based on all monies that a buyer pays to seller, whether in cash, promissory notes, assumed obligations, covenants not to compete or consulting agreements; in the case of stock, total consideration includes the selling corporation’s liability less its cash and accounts receivable;
* commission is due and payable in cash, cashier’s check or by wire transfer;
* in the event broker is required to sue to collect its commission because of seller’s breach of the agreement, seller agrees to pay all costs of collection including reasonable attorney’s fees;
* commission shall not include value of any real estate transferred to buyer in states where (a) a real estate license is required and (b) the broker does not have such a license; and
* how money will be divided in the event that earnest money is paid by the prospective buyer as liquidated damages.
The Author’s Pet Peeve
Many sellers and buyers are very casual about letters of intent, often to their detriment. In some transactions, the letter of intent or memorandum of understanding is drafted by the broker using a fill-in-the-blanks boilerplate letter. From the perspective of both the seller and the buyer, the letter of intent is too important a document to be prepared by the broker based on a generic template. Even when an LOI is drafted carefully, litigation might ensue. Even in instances when the letter of intent states that it is not intended to be binding, some courts have imposed a duty to negotiate in good faith. A well-drafted and negotiated letter of intent makes the negotiation of the definitive agreement speedier and easier. Both sellers and buyers need to give careful consideration to the provisions to be included in a letter of intent – the letter should be viewed as a strategic and tactical document. It has been called a form of “anti-renegotiation” insurance. It keeps the lawyers and the parties from renegotiating the terms of the deal.
Erwin G. Krasnow, the co-chair of the Communications Group of Garvey Schubert Barer, is a former General Counsel of the National Association of Broadcasters, Washington counsel to the Media Financial Management Association, and a coauthor of Profitably Buying and Selling Broadcast Stations and Washington counsel to the Media Financial Management Association. He concentrates on transactional matters and has represented sellers and buyers of broadcasting, cable, tower and telecommunications properties in transactions totaling in excess of $21 billion. He can be reached at [email protected] and (202) 298-2161.
