If there is a Wild West in private equity (PE), it will be a low -China market (LMM). This is the ecosystem of a company that has a profit of $ 5 million to $ 50 million. LMM offers advantageous opportunities, but has a unique risk that can derail even the most promising transactions. For investment experts, in order to navigate this space, it is necessary to deepen the risk of agencies, which are often overlooked, derived from qualified intermediaries and inexperienced sellers. there is.
The end of this market is very different in terms of management quality, corporate infrastructure, and economic execution (after management). Furthermore, the end of the market is strict under the advice that the service provided by the business broker operated in this market is not as sophisticated as the larger PE market.
In many cases, sellers have little company or financial experience. Rather, they are technical and operating experts and often built their business from zero without the help of institutional capital. In many cases, sales transactions are the first business owner of business owners to the world of merger and acquisition (M & A). These business owners sell life work.
LMM Business Broker Profile
Business brokers (the intermediary in the lower central market) are not often sophisticated M & A experts, such as investment banks and lawyers. However, they have little difficulty to convince the seller. Brokers know enough about M & A processes. Brokers usually gain trust in this market, considering that they are the first contact with business owners who are considering M & A. This new trust, or tolerance, will quickly change to a “advisory” relationship with the long non -circus period where the broker is straight in the middle.
At first it is blush, and this arrangement does not raise the red flag. Brokers can help sellers to the market. That's not anything wrong. Problems and risks are due to the fact that marketing relationships often change into de facto financial recommendations and/or legal recommendations. This is often because the seller does not know if the seller wants to sell. Sellers are reluctant to spend money on appropriate advisors before they are convinced of the possibility of sales. Brokers often intervene to fill this blank, generally negotiate intent letters (LOI) on behalf of sellers, and leave them to trading conditions.
This is the risk of an important agency[1] It will appear. The risks of agencies that LMM sellers and buyers should recognize and try to alleviate are the following three subcategories:
- anchor: Brokers may fix the seller to the conditions without the market. Unlike investment banks, which can see hundreds of transactions a year, some brokers may work less than five times a year. Even worse, some or all of these transactions may not be closed. However, this may not stop providing opinions on what seems to be the market conditions of a specific part of the transaction. The seller has been fixed to the interest rate to the broker. As a result, the broker acknowledged that it was obtained from the tram sheet of the non -closed transaction. Fixing the non -market terms erodes trust by worsening strict and emotional negotiations. The broker is good at convincing the seller that he is an M & A expert, so the seller may believe that when some terms that do not follow the anchor come, the buyer is not fair or approaching.
- Bad advice: Bad advice is an abbreviation error. It happens when a broker misses what a lawyer or financial advisor catches. This is usually related to details. For example, brokers often help sellers negotiate with LOI, but buyers do this task to the lawyer. You can imagine mismatch. When LOI is signed and the seller is finally involved in a lawyer, the lawyer sees the signed LOI and points out areas where the seller is disadvantageous. Such situations can lead to poor optics. The seller will think again that the buyer is trying to make it advantageous. These situations suppress trust by worsening already strict and emotional negotiations between buyers and sellers.
- phone: Some brokers claim that they stay in the middle of the conversation, are involved in telephone and conference, and some sellers give their brokers on behalf of them. The risk of the agency here is that the broker may be free in negotiations. For example, a broker may neglect to refuse the idea with the seller before providing it as a term or compromise. Brokers misunderstand or misunderstand the period from the by side to the seller if the particularly agreed term of the broker looks bad. Both situations can lead to frustration, re -trading, and eroding trust.
The risk of an agency is a real problem, and it can be significantly difficult, even if it is not impossible to complete the transaction. If you know this, there are several ways to control the risk of agencies and partially reduce them.
- Talk to the broker frankly about the anchor. The broker is incentive to complete the transaction. If they recognize the influence of the anchors that their words can be given to the seller, it may make a difference. We acknowledged that the broker was saying too many things, and gave good results on the anchor status we acknowledged what we learned. By talking with a broker about various transactions and fixing to your opinion, you can save a lot of pain later.
- We will advise the seller to get the advisory service. For us, the seller with a lawyer indicates the serious level of sales processes. If the seller is not lined up with legal advisors or financial recommendations, advise you to do so. Loi is not legally binding, but it is important to note that it usually includes “honesty” clause. In other words, it means that the parties must act in good faith to close the transaction according to the LOI terms.
- We only negotiate with major sellers. Just negotiate directly with the seller, you can confirm that translation does not lose communication. Nevertheless, some sellers are very busy with business management and usually depend on agents and brokers to manage sales processes. In this case, it is important that the seller copies and negotiates the trading conditions in writing. Ask the seller to check the details of the negotiated conditions with the broker.
These procedures do not eliminate the risk of agencies, but provide better routes for smooth negotiations and closing.
[1] The risk of an agency is generally defined as a conflict of interest that the agent does not act for the best profit of the principal.
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All posts are the author's opinion. Therefore, they should not be interpreted as an investment advice, and the statements that are expressed do not inevitably reflect the viewers of the CFA Research Institute or the author's employer.
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