In the course of our everyday business meetings we have all found opportunities that would place us in the positions of being a “broker.”
I’m not talking about the business broker or the stockbroker although both have things in common to this specific article. I’m writing about the deals that come across your desk that may sound outlandish, or very speculative, but you think you know a friend of a friend who could benefit.
Welcome to becoming an intermediary or, in this case, a deal broker.
When I go to a networking event, unlike some people I know, I try to meet people who can make a difference in a client or friend’s life. I know a lot of networkers who try to sell themselves at the first opportunity to hand out a business card, but I like to think networking events have a higher purpose.
I’ve been offered “deals” purportedly worth hundreds of millions. I just have to introduce this person to this guy and Bam! It’s a done deal – oh I wish!
The problem is that the people I know are eating out of a different trough than the people I’m looking for, but they know someone who knows someone. They usually know someone who, in fact, is another broker or opportunist who has a broker who knows someone. It’s a daisy chain and the cycle never stops.
I once tried to sell a 747 jet and figured I had it in the bag. I knew someone who had a jet – or did I? The problem is that at any given time there may be one jumbo jet for sale in the world and 20,000 legitimate brokers who want to find a buyer. Add friends of friends and the number escalates to the point where you have no idea if the deal was an exercise in futility or if there really was a jet for sale in the first place.
The worst is when a broker represents himself to be the man with the money when, in fact, he is trying to find the money guy while negotiating with you. All he ends up doing is stalling the deal or wasting your time.
Another scenario I see all the time is when pro facilitators get “wannabe” dealmakers into the scenario. They don’t know the nuances or the etiquette of the deal or even how to behave. As the payoff gets close, they don’t know how to act and usually get greedy so the deal goes south. These guys drive me crazy with how much they think they’re worth—and the amount of chaos they can cause—by just flipping a phone number over to someone.
It was the same problem of sorts when I was an arms dealer in the 1980s (licensed and government sanctioned, of course. I wasn’t Nicolas Cage in Lord of War). I didn’t always know if that nattily dressed air force Colonel I met was really the buyer or simply another go-between representing someone else. In the case of the Colonel in uniform, he was indeed the real deal, though it wasn’t quite as dramatic as James Bond might have you believe.
I’m currently in talks with two parties who have a need for money and are offering great rewards. These rewards are life changing and take on the semblance of a dream or perhaps a nightmare. It makes one dream of Bentleys and seems like a safe and thought provoking way to slumber.
It’s not my money so there is no fear there. The risk is on my friends who believe in my connection that could come back to bite me. Everyone is on board because as long as you only invest as much as you can afford to lose, it’s a no-brainer.
The broker idea is worrisome. I’ve been told one of my faults is that I am too honest – seriously? Apparently most businessmen need to have a wicked streak in them to function in the real world of finance.
I’ve had commissions bandied about, and they are astronomical just because the volumes are so high. Now, I am no slouch when it comes to researching and have always believed the Lehman Scale (or Formula) was a good place to start off with in terms of fees paid to brokers for putting legitimate deals together.
The original version of the Lehman Scale gave the broker a percentage of the deal as follows:
- 5% of the first $1 million raised from investors
- 4% of the second $1 million raised from investors
- 3% of the third $1 million raised from investors
- 2% of the fourth $1 million raised from investors
- 1% of everything above $4 million raised from investors.
According to Wikipedia, the scale was “developed in the early 1970s by Lehman Brothers, for underwriting and capital raising services. Before this, the charge would vary wildly from institution to institution. In some cases, the charges exceeded 15%. The Lehman Brothers created a formula to apply to the dollars in terms of total capital of a transaction, rather than a larger share of equity dollars.”
Now if your talking about a $100,000,000 deal (I just had to write the number out), that gives you over a million bucks for putting two people together. It’s that simple – not!
With high tech startups pumping up values in Silicon Valley, a new scale emerged – the Modern Lehman. Of course, it had to be from America.
The Modern Lehman was mainly used by M&A guys but became much more lucrative for brokers – isn’t inflation great? It looks like this:
- 10% of the first $1 million, plus
- 9% of the second $1 million, plus
- 8% of the third $1 million, plus
- 7% of the fourth $1 million, plus
- 6% of the fifth $1 million, plus
- 5% of the sixth $1 million, plus
- 4% of the seventh $1 million, plus
- 3% of everything above $8 million.
My friends and I use the Modern Lehman for obvious reasons but it works for everyone. There are other variants, of course, but you get the point. If a deal is to go through with a number of brokers, it’s unlikely to happen if there are 3-4 brokers on one side and the same on the other just because they knew someone who knew someone. So add 3% to each side and now the deal has to pay out 18-21% before the investors ever sees his money.
When the monies involved are obscene and on the scale of which dreams are made, everyone has solace in the fact that there are protections in place called Irrevocable Monetary Fee Protection Agreements (IMFPA). At a high level when the broker fee is in the multiple of millions, you need to be listed on the IMFPA so the paymaster at the conclusion of the deal can pay you from disbursements.
I loved the days of old when I used to refer a business owner to a graphic designer whom I had met networking and the designer quickly sent me a 10% referral fee with a thank you note in the mail. Ah, for simple times!
Now what color Bentley should I buy?
Gary is CEO of Bizzo Management Group Inc. in Vancouver. He has mentored over 1000 business leaders, investors and entrepreneurs. London-based Richtopia placed Bizzo on the Top 100 Global Influencers in the World for 2018