by Erwin G. Krasnow, Doug Ferber & Bishop Cheen
Deal flow speaks volumes about the entrepreneurial appetite for broadcast properties, and with the FCC’s broadcast incentive auction drawing closer, Garvey Schubert Barer attorney Erwin G. Krasnow ([email protected]), DEFcom Advisors CEO Doug Ferber ([email protected]) and SNL Kagan Analyst/Consultant Bishop Cheen ([email protected]) have written an extensive commentary de-bunking common auction myths. Previously, they covered the myth of “the greater fool strategy”.
Here, the trio discuss the myth to “avoid intermediaries whenever possible”.
Many first-time buyers do not recognize the value of using qualified brokers or investment bankers to locate a property. Intermediaries play a useful role in bringing prospective buyers together with station owners desiring to sell their station. They exist for a reason: third parties can say things to buyers and sellers that they could never say to each other.
Even LeBron James, one of the most marketable personalities, 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.
Keep in mind that brokers and investment bankers prefer to work with financially qualified buyers. It is important for prospective purchasers to “flash the cash” upon entry. Indeed, the buyer’s primary task is to convince the intermediary that he or she 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 or 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. 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 the selection of the buyer whose offer will be accepted. They 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.
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 the fifth million and amounts greater than $5 million. The fees were 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 $25 million; 1.5%, between $20 and $50 million; and one percent, above $50 million. Although not publicized, it is not uncommon for brokers and sellers to negotiate the fee formula.
Speaking of intermediaries, we recommend that a first-time buyer have a mentor — someone in addition to their banker, broker or attorney, someone experienced in deals who would have the buyer’s interests solely at heart, someone the buyer trusts and admires. Unless the buyer apprenticed under a good deal-maker with a strong track record, the first-time buyer should find as a sounding board someone who can offer guidance in the areas of the intangibles of a transaction, namely, those areas that the broker, banker or lawyer may not instinctively be able to see and communicate.
Another source of guidance for first time buyers is the NAB Foundation’s Broadcast Leadership Training program (www.nabef.com), a two-month Executive MBA-Style program. Media mogul Donald Trump, in Midas Touch, commented: “As an entrepreneur, I choose my teachers carefully, very carefully. I am extremely cautious of the people with whom I spend my time and to whom I listen.” That’s good advice.
Next time, the authors will cover the myth that it’s just a letter of intent.
Erwin Krasnow co-chairs the Communications Group of Garvey Schubert Barer, is Washington counsel to the Media Financial Management Association and former NAB general counsel. He has represented sellers and buyers of broadcasting, cable, tower and telecommunications properties in transactions totaling in excess of $21 billion. Reach him at: [email protected]/
Doug Ferber began his career as an entry level sales trainee for Bonneville International Corporation in 1984. After milestone assignments with Capital Cities/ABC and Interep National Radio Sales, Doug has brokered more than 50 transactions valued at over $400,000,000. He founded DEFcom Advisors, LLC, a Media Financial Consultancy Company, in 2009. Reach him at: [email protected]/
Bishop Cheen writes the “CAPITAL Letters” blog for SNL Kagan, is a consultant for Kagan Media Appraisals on valuations, expert witness and other financially focused assignments. He also teaches seminars and online courses (for the SNL Knowledge Center) on trends, economics, and valuations in the media/telecom industries. Bishop retired from Wells Fargo in 2012 as a managing director and senior analyst. Reach him at: [email protected]/