Radio station brokers specialize in the buying and selling of radio stations, representing one side or the other in such transactions. As more stations change hands each year, especially in recent years, the role of the broker is an increasingly important one. Commercial radio station licenses in the United States are issued for a finite period, but after each license term there is an expectation of license renewal. Because the expiration of a radio station's license does not usually correspond to the timing of a station's sale, the Federal Communications Commission (FCC) will readily grant a license transfer from a current licensee to a prospective owner, provided that the prospective owner is an acceptable licensee under the FCC ownership rules. The licensee and the prospective owner must submit a request to the FCC for a license transfer.

     The assets associated with a station are sold or transferred to another entity either through a conventional sale or through an exchange of assets commonly called a "swap." Just as is true with the sale of any other business, a variety of external or internal events can cause an owner to consider the sale of a station. Externally, a radio station's geographic market or audience may change in a manner that is incompatible with a particular owner's goals. Internally, the particular financial structure that supports a given station may require that the station be "refinanced" in a manner so comprehensive as to require a sale. Other factors that commonly trigger the decision by a station owner to sell include death and consequent estate issues for shareholders, as well as disagreement among principal owners.

Role of Brokers

     Radio station sales can be handled by the owners themselves, their attorneys, accountants, small business brokers, investment banking firms, or specialists such as radio station brokers. As the name implies, radio station brokers are industry­ specific agents, and, as such, these brokers specialize in representing buyers or sellers of radio stations. After years of specializing in these kinds of transactions, radio station brokers are often also able to assist their clients in refining the future economic projections for a station's operation. One of a broker's main tasks is to properly guide and manage the expectations of his or her clients. Because station brokers are especially familiar with the radio industry, they can often spot unrealistic economic assumptions made by their clients. When a radio station broker is working for a seller, it is his or her responsibility to coordinate efforts with the station's owner, lawyers, and/or accountants to help ensure a desired economic or strategic result. In those instances when radio station brokers work for buyers, the broker's responsibility is to assist the buying principals and their financial advisers in locating and purchasing radio stations that fit the buyers' criteria.

     After a definitive agreement is reached between station buyers and sellers, all radio station license transfers must be approved by the FCC. Radio station brokers will usually encourage owners to obtain legal advice from attorneys who are familiar with the execution and submission of the proper forms required by the FCC. Following correct FCC procedure is imperative, because failure to do so can result in severe fines or even in license revocation by the FCC.

     Professional radio station brokers attempt the marketing and sale of radio stations so as to create minimum disruption to a station's personnel, revenue, and profitability. This challenge can be difficult to meet. In order for a station to benefit from being sold at the highest price, it is in the seller's best interest that the greatest number of potential buyers be approached; however, the larger the number of buyers contacted, the more likely it is that the employees of the station will learn that the station is being offered for sale. This awareness can create unpleasant instability among the station's staff. Similarly, station advertisers may also learn that the station's ownership is expected to change, and, as a result, the advertisers may be inclined to limit or change the plans for their advertising expenditures in a manner adverse to the station's economic well-being. Radio station brokers are paid to navigate this difficult road.

How Sales Are Made

     The normal procedure followed by a station owner who anticipates selling his or her station first includes the choice of a radio station broker or others experienced in the selling of businesses similar to radio stations. Most radio station brokers are known to station owners and are listed in various radio industry publications. Once a broker is selected, a fee structure is negotiated. Fee structures vary depending on the nature and anticipated price for the property being sold. Most frequently, brokerage fees range from 6 percent to as low as 1 percent of the sale price. The resulting percentage is related to the size of the transaction, with the larger transactions paying lower percentages to the brokers. The seller should confer with the broker and with various advisers in setting an asking price for the radio station, because a wide array of factors must be considered in the price-setting process. Pricing considerations should include data from comparable sales, past economic performance of the specific assets being sold, and the anticipated future earnings performance for the assets.

     Most sellers instruct their brokers to secure assurances of confidentiality from the prospects being approached during the sales process. Such assurances are often contained within a confidentiality agreement that is signed by potential buyers before they are given specific information with respect to a purchase opportunity. Potential buyers are furnished with certain information by the radio station broker about the station being offered for sale, commonly referred to as a "book." The book usually contains general information about the station, economic facts pertaining to the market being served, the station's competition, its audience, and its historical financial performance. The prospective buyer will review the book and based on its information will prepare various financial projections with respect to what the buyer feels the station may earn for its owners over a future period of time. Such future projections are called "proforma estimates," and each may contain a different set of assumptions with regard to items such as competition, ratings, and revenue. Each buyer typically has his or her own set of pro forma objectives and will measure the relative attractiveness of each acquisition opportunity against these objectives.

     Once a buyer becomes relatively comfortable with the material he or she has reviewed, the buyer may seek to enter into a written agreement with the licensee. This document is typically called a "letter of intent." The letter of intent usually sets forth various terms and conditions under which the buyer will proceed. This agreement also sets forth the intent of the buyer with respect to confidentiality, pricing, and timing of the contemplated transaction. The letter of intent typically also includes agreement on the procedure and responsibility for the preparation and negotiation of a definitive purchase and sale agreement to be used in the sale. The letter of intent will frequently provide the buyer with an exclusive period of time during which time only this buyer or his or her agents can conduct a thorough investigation of the various factors influencing the station's operation. This period is commonly referred to as the buyer's opportunity to conduct "due diligence." Either at the conclusion of such investigation or at the same time such investigation is progressing, the buyer and seller frequently agree to move cooperatively toward the formulation of a definitive purchase and sale agreement. Sometimes, for various reasons, the seller and buyer eliminate the step that involves a letter of intent and instead move directly to a definitive purchase and sale agreement.

     There are a number of factors influencing a buyer's and a seller's decision on whether or not to include a letter of intent in the purchase process. Among the consideration for sellers is whether or not they wish to "encumber" their flexibility in negotiating the sale of the station with other potential buyers during the time a letter of intent is in force. Sellers are also frequently concerned that, notwithstanding an agreement as to confidentiality, word of the possible transaction might "leak" during the period that the station is under a letter of intent. Included in the decision process regarding letters of intent for buyers is whether or not a buyer wishes to expend the money and effort to perform due diligence and to continue contemplating the purchase of a specific station, without any firm rights to actually compel a sale of the station to this particular buyer.

     Once a definitive purchase and sale agreement is executed, it is filed for consideration with the FCC. The FCC review process includes an opportunity for the public, the FCC, and other governmental agencies to register any objections to the license transfer. If there are no objections, the FCC will typically render its "preliminary" approval within a generally predictable number of days. Thereafter, there is an additional period of time before the FCC approval automatically becomes a "Final Order." The closing on a station's sale transaction usually takes place within a reasonably short period of time following issuance of the Final Order.

     There are many strategies that drive the desire to purchase or sell a particular radio station. The radio station broker becomes conversant with the client's plans with respect to economic goals. FCC legal limitations on station ownership, as well as Department of Justice considerations with respect to market dominance leading to unfair competition, are among the factors that constrain buying and selling strategies. Informed radio station brokers assist their clients in conceptualizing and implementing their acquisition or exit strategies.

Sales Trends

     In the 38 years from 1954 through 1992, FCC files indicate that nearly 20,000 radio stations changed ownership-some of them several times. The volume of radio station sales exploded with passage of the Telecommunications Reform Act of 1996. The sudden heated demand for the ownership of radio station "clusters" occurred simultaneously with an extremely robust public stock market, which provided large amounts of investment capital to those companies that were able to take advantage of an unprecedented opportunity to rapidly amass a large number of radio stations. In the four-year period following passage of the act, ownership of 7,839 radio stations changed hands, with well-capitalized radio companies emerging as highly acquisitive in markets of all sizes. As the5e clustered acquisitions continued, the single- or two-station owners came under increased competitive pressure. In 1996 nearly 21 per­ cent, or 2,157 stations, changed hands. In 1997 a similar number, 2,250 stations, were sold. In 1998 the number of stations changing hands went down only slightly, to 1,740 stations. Consolidation of radio station ownership extended into even the smaller markets as the beneficial economics of consolidation were clearly established. In 1997 the average station sold for about $8 million; this price dropped to about $5 million in 1998, as stations in the smaller markets began to represent more of the sales.