Business brokerage is burgeoning in the Washington area. Forget the megamergers, junk-bond financing and golden parachutes of the Fortune 500. This is the world of mom-and-pop operations, pooled savings and sweat equity. Here, brokers arrange the sales of businesses ranging from fast-food carryouts, dry cleaners and liquor stores to dinner theaters, satellite manufacturers and automobile distributorships.
According to Pinkus Fliegel, who has been in the brokerage business for 30 years, most of it in Silver Spring: "I'll sell anything that comes along. Make me an offer."
At this level, business brokerage is as much art as science, fraught with risk for both buyer and seller. Fortunes can be made; life savings lost. "Everybody thinks they can run a [small] business more successfully than the guy before. The businesses we sell are largely successful, but there are always some people who bite off more than they can chew," said John Johansen, 32, a recent convert to business brokerage from financial services.
Brokers in the business of handling business sales range from those with Harvard MBA degrees to those with only street smarts. A business broker functions something like a real estate broker and an investment banker, but in fact is neither one. He or she may be called in to sell a business for any one of a dozen reasons, including retirement, death, divorce or just owner burnout.
Business brokers in this area must work in a rapidly changing small-business climate at a time when their own field also is changing. Small retailing here in recent years increasingly has been shifting from the hands of American- or European-born whites to immigrants from Asia, India and other parts of the Third World.
Brokers must bridge these gaps at a time of increased competition and the introduction of franchising to their field.
The broker takes listings from owners trying to sell, and seeks buyers. There is no multiple-listing service, as confidentiality is deemed essential. The broker's commission -- 10 percent is the benchmark rate, although the effective rate is often less, brokers say -- usually is paid by the seller at settlement.
Whereas some brokers try to market the business at the owner's asking price, many appraise or evaluate companies and help set the selling price. The rule of thumb for pricing a business is 15 to 20 times gross weekly sales, according to Washington attorney Bernard Dietz. (In a field where skimming is prevalent and tax returns suspect, the buyer sometimes will verify this firsthand before closing the deal.)
Financing Is Complicated
Brokers do not attempt to secure financing for buyers. Because banks generally do not make loans for this type of deal, the seller usually agrees to hold a note. A typical transaction requires a down payment of 30 to 40 percent, with the balance to be paid off within five to 10 years from operating income.
Brokers justify their services and fees on the grounds that they sell ongoing businesses, not merely physical assets. Rather than closing the door upon retirement, a business owner will receive compensation for goodwill or the customers he has attracted over the years. Convenience stores and similar operations in which the owner works very long hours turn over most often, brokers say. It is harder to sell businesses that require some skills, such as television repair or upholstery stores, they add.
Statistics on sales of privately owned businesses and brokers' earnings are closely guarded, and any information volunteered is difficult to verify. It's a "silent industry," in the words of Nelvin Banner, who boasts a quarter-century of experience, most of it with Banner Business Brokers in Bethesda.
The Department of Commerce estimates that 18 percent of the 15 million U.S. corporations, sole proprietorships and partnerships change owners each year. The business brokerage industry claims to handle approximately a fourth of those transfers, up from a minuscule 2 percent a few years back.
Given that the typical business in 1983 sold for an average price of $88,000, according to the Internal Revenue Service, that works out to about $60 billion annually. The two largest franchises say the combined value of the businesses they sold amounted to $1.1 billion last year. Locally, of the firms interviewed, only two, which claim to be the largest, were willing to reveal sales figures. Each said it had sales volume of between $20 million and $30 million, numbers that were heartily disputed by their rivals.
Thomas L. West, of the International Business Brokers Association in Concord, Mass., estimates there are about 3,000 active business brokers and a like number of real estate brokers who also sell businesses. In the greater Washington area, the number of business brokers is unknown, although the Yellow Pages list about 50. One insider claims there are about 20 brokers known and recognized within the industry, but admits there are many other real estate brokers, attorneys, accountants and others who do it part time.
Where once the buying and selling of local businesses was done by a small group of independent practitioners, the dominance of the old-line firms increasingly is being challenged by new immigrant brokers as well as national franchises. The competition has resulted in somewhat lower commissions for sellers and substantially increased friction among the players.
The change can be attributed to several factors: regional business expansion, a change in immigration laws permitting more non-Europeans to enter, national real estate franchises, and deregulation.
Current Trends Criticized
A generation ago, most business brokerage was done by a handful of first- and second-generation Americans, like Kogod & Bookoff, Al Stern and Sam Blanken, according to Bill Banner, Nelvin Banner's son.
The surviving old-line firms tend to criticize the current trends, which they believe result in a lack of professionalism.
Years ago, the District required brokers to pass an examination to obtain a "business chance" license, a test that the licensees described as tougher than the real estate license exam. Only 13 states and the District required a business chance license. Since such licenses were abolished in 1983 as being "obsolete," none of the three jurisdictions regulates brokers as a profession distinct from real estate brokerage.
The Virginia Supreme Court recently ruled that unlicensed business brokers (those without a real estate license) could not prepare binding purchase and sale agreements. But that is not typical; only 17 states require business brokers to have real estate licenses in order to operate, according to IBBA.
Fred Blanken, 52, whose father Sam founded the business in 1943, rails against what he views as the unethical and unprofessional conduct of some unlicensed business brokers. He says he refuses to cooperate in deals involving some franchisees.
Bill Banner, 28, who has 10 years' experience, accuses Korean brokers of getting buyers to sign contracts without obtaining tax returns or disclosing all pertinent information about lease agreements and equipment lists, and taking deposits even though they are not bonded. As a consequence, he says, some clients have been hurt and have sued sellers.
Since the early 1970s, when immigration quotas were abolished, immigrants have played an important part in small business here. Business brokers interviewed say they represent between 50 and 99 percent of the buyers today, while the sellers are predominantly Caucasians. Koreans tend to buy groceries and carryouts; Vietnamese, gift shops; and Asian Indians, motels. Typically, an extended family will work for several years and pool resources in order to afford the down payment, which can exceed $35,000 for a grocery store.
As sales to immigrants increased, so did the number of ethnic business brokers. H. Noh, 44, a native of Korea who has run a brokerage in the District for the past four years, says that business is poor even though Koreans are very active buyers of grocery and convenience stores.
As the Korean community has increased in size to 45,000, business owners have sought to cut out the middleman. Some have done this by organizing a "gye," a Korean term meaning a private loan club that funds its members' business activities. But because it functions like a pyramid club, participants sometimes lose their money.
Joe Badra, 44, a Palestinian, worked his way up from running a grocery store to running a brokerage. After an apprenticeship with Sam Blanken, Badra opened his own multinational firm. "We have Koreans, Greeks, Italians, Syrians, Lebanese, Japanese, Ethiopians and, I am proud to say, American Jews." Badra, who claims his firm did $20 million in business brokerage last year, said the secret to success lies in combining it with related activities, such as commercial real estate development.
Franchises, Badra asserted, never will take over business brokerage because it is essentially a local enterprise. That was what independent real estate brokers said a decade ago at the dawn of franchise operations such as Century 21. During the period of soaring interest rates in the early 1980s when home sales wilted, some real estate franchises even diversified into business brokerage with little success.
VR Business Brokers, a national franchise, was the first to move into the Washington area in 1980. Johansen, a principal in the Arlington office, one of six independently owned VR franchises here, described the situation at that time as a "cottage industry."
Franchises such as VR tout their advantages over old-line firms: professional training, a network of affiliates for national and international sales, corporate advertising and substantial capital requirements. VR Arlington, which has a Harvard Business School graduate on staff, claims it and the other area franchises handled approximately a quarter of the businesses sold last year, or about 250 transactions worth $30 million. Most other area brokers dispute this claim. Nationwide, VR has 280 franchisees, who did $500 million in business last year, according to President Aziz Karsan.
Franchisees say they feel national companies will lift professional standards. The IBBA seeks a type of certification as a profession, but opposes any type of government regulation. It is also trying to differentiate its members from strictly local independent practitioners by moving members away from selling mom-and-pop operations, which don't generate enough commissions, toward businesses in the $300,000 and up range.
Will franchises crowd out old-line firms or will they wither away?
At least one national business brokerage franchise, Professional Business Brokers of America, already has failed here, and others are said to be in trouble.
But CIBB franchisee Paul Steel, 38, of Rockville, predicted confidently that everything in the business brokerage business will be franchised in the next 10 years.
Or will the various types of firms coexist? Chuck Monahan, a newcomer to brokerage who owns the Rockville office of Business Investment Group, said that business brokerage, unlike real estate, which has hundreds of brokers in the area, still has room to grow. "The pie is increasing," he said. "All those baby boomers will be selling their businesses more frequently as they move up the ladder."