Strategic threats to the business brokerage & investment banking industry… and a turnaround solution

The primary function of business brokers and investment bankers is to cultivate deals, compose marketing memorandums and to create a distribution list of enough bidders to get the highest valuation for their clients. The industry is characterized by highly motivated, well-educated and well-connected people. The network and skills of the industry participants served as a barrier to entry; and the contingent fee structure made the industry highly profitable. But is there is a strategic crisis pending in the industry? Will the age of the Internet tear down the traditional barriers that bankers have enjoyed. Let’s look at the trends in each of the five forces:

Barriers to entry

  • Finding deals – Businesses are more often posting directly to deal websites
  • Closing deals – Private equity firms are easy to find and non-brokered deals are being welcomed

Substitutes

  • Websites are becoming a common platform to connect buyers and sellers directly
  • A structured platform is making Confidential Information Memorandums (CIMs) a commodity

Supplier Power

  • Brokers are increasingly relying on business transfer websites for new brokering leads
  • These same sites are soliciting buyers/investors reducing the need to refer brokers

Customer Power

  • Smaller companies are becoming more empowered by the internet options available
  • Larger companies are also feeling more empowered by the simplicity of creating an auction.

Rivalry

  • Professionals working on an hourly basis reduce the industry’s lucrative contingent fees.
  • Disintermediation leaves more brokers chasing fewer “brokered” deal prospects.

Although brokers/bankers still have some advantages, none of these trends are positive. Can these negative trends be turned around? Yes, but brokers/bankers need to turn the power of the Internet in their favor.

The Solution

Valuation & transaction planning as a service

The bulk of transactions are still being brokered, this needs to be leveraged. The brokerage industry can network statistics from this transactional information through StatTrader.com; and, since the statistics can be linked to connect anonymous contributors, brokers/bankers can take control of a valuation and exchange marketplace. When you enlist a company earlier by offering continuous valuation feedback (from these transactional stats), and when you align sellers with buyers years in advance via solicitation of anonymous valuation feedback, sellers will see the value of the broker/banker. As such, they will be less likely to start the process over again when the need for a transaction finally arises.

Bring the business of auctioning on line

Brokers should also manage target prospects and financing contacts via their own private database maintained in a secure cloud offered by StatTrader.com. These databases, just as above, are statistically but anonymously linked. This enables a speedy transition from teaser, to electronic NDA to CIM distribution. A networked database will increasingly and organically become qualified as intermediaries convert anonymous connections (via statistical links) to fully vetted contacts.

Network across a broader company and professional network

Bankers, private equity firms and high network investors that are monitoring their loans and investments would also like to belong to a transactional network with powerful information about deals and valuations. Add to this the ability to see new deals and connect with new resources and you have the formula for maintaining an organic network of potential capital providers willing and able to close deals.

Conclusion

If an intermediary’s service is not adding value, it will go away. By providing a continuous valuation service and by creating a targeted group of interested buyers/investors years in advance, the broker is adding value. Combine the transaction stat networking feature that is potentially controlled by the brokers and bankers and you have the leverage to reverse the trends in the 5 forces.

About Steve LeGraw

Steve is the President and Founder of StatTrader.com. StatTrader licenses it technology and patented StatTrading process to professional firms and to professional and business associations that can gain by creating a valuable networked database of stats. Each intra-network gains a “trading” clout to network with other groups. Each association’s intra-network can then be cross connected with other networks. This effectively connects buyers, sellers and their professionals creating an unparalleled networking scale and scope.