21 Feb Investment Banker vs. M&A Advisor vs. Business Broker
Hiring the right team is one of the most important decisions you will make when considering the sale of a company, especially for owners of businesses in the low to middle market. There are many options and so many groups that make the decision confusing when evaluating what type of advisor you need or who will really serve your interest best. The low to middle market market is serviced by many deal makers that include: M&A advisors, business brokers, and investment bankers. There are several factors you should consider and clearly understand the differences between these merger & acquisition professionals.
Business brokers typically serve smaller companies that will likely sell to an individual buyer (vs. a corporate or institutional buyer). The types of businesses they usually service are hair salons, franchises, gas stations, dry cleaners, convenience stores, small service businesses, single location restaurants, etc.. The professional agreement terms that are used are very similar to selling a house. It is rare that a business broker will charge an upfront fee. However, it is very common that they will require that the preparation of marketing materials and historical and forecasted financials be all done by the business owner. If you are a buyer, you should know that most, if not all, the preparation is done by the seller. This creates a much bigger transaction risk for both the buyer and seller – it is more likely that the books will not be prepared in agreement with GAAP accounting standards and/or it is highly unlikely that they are audited financials. The typical transaction is the sale of the company’s assets using template or standard legal forms. These forms often omit key sections that minimize post-transaction liabilities.
The process that is used for listing the company for sale is very similar to that of listing a house for sale. Market information is available and collected about the business for sale and the company is advertised on websites and marketed with an asking price. The business broker, while they may have a larger organization, usually work alone on developing the listing information and get the business “ready” for the selling process. Depending on the geographical region your business is located a business broker may post the business ad on several local online outlets. Many professionals call this the “post and pray” strategy. Overall, the process of selling your business with a broker is “passive” as opposed to strategic.
A buyer will have several financing options. Two of the most common options include: SBA loans and a seller note (note that it isn’t uncommon to see a combination of the two). The companies that business brokers sell companies are typically owner-operated and the valuation is typically based on “seller’s discretionary earnings” (cash flow to the owner/operator). In almost all cases the business is sold for the “rule of thumb” financial multiple this is because it is less common that a buyer would be strategic and have the desire or need to pay a premium.
M&A advisors and investment bankers are similar in their offerings, though there are certainly some differences. M&A advisors bridge the transaction market gap between the smaller businesses that are sold by business brokers (typically less than $2 million transaction value or less than $1 million in EBITDA) and medium to larger size businesses that are clearly led by investment bankers (where the deal size is greater than $100 million or EBITDA is greater than $30 million). The larger transactions typically take on a more complex structure and the regulatory bodies require the servicing professionals to carry certain licenses. However, depending on the transaction structure, some lower middle market transactions do not require the advisor to be licensed under the securities laws. You will find that most M&A advisors are not licensed. This is very much a grey area and subject interpretation of certain foggy facts that will hopefully be addressed by the SEC and congress in the months to come. If not carefully navigated this can create additional transaction risk to both the advisor and the transacting parties.
Investment bankers typically offer a broader range of services and work with larger companies; however, in the last 5 to 10 years it is more common to see investment banking firms servicing clients in the middle market. Investment banks provide several services that business brokers do not. Some of these services include: fairness opinions, public offerings, a much broader line of financial services, etc… All of these require formal licensing as a broker-dealer. Additionally, investment banks are usually staffed with various professionals that provide a wider range of experience, licenses and other certifications. The depth of experience and wide array in skill set allows the bank to handle more complex transactions and provide these technical services.
In general, investment bankers are purely transaction driven and have a minimum fee expectations (which tend to create a floor in the size clients that they serve). Interestingly, we are starting to see some firms offering a value creation model. Under this model the fee structure is “aligned”. The approach that these investment banking firms take is to structure their fee so that is aligns with the success of the transaction: i.e. if the firm is able to put more value on the table then they get to participate a little more in that value. This is the very reason why larger companies seek a professional groups and are willing to pay retaining fees. It takes real work to put together a marketable book, prepare management for due diligence, carefully target potential acquirers and navigate sensitive negotiations. When done correctly the increase in transaction value more than covers the increase in fee and owners are able to maximize proceeds from the sale of their company. This isn’t unique to investment banks. M&A advisors tend to be somewhat consultative and might work with clients in the pre-selling strategy and planning phases as they consider their exit or liquidity alternatives.
How M&A Advisors and Investment Bankers Are Similar
Both Investment Bankers and M&A advisors run a proactive process to sell a company that is structured and usually focused on creating a competitive and timed market for the seller with the goal of optimizing the value and reaching the seller’s objectives. As mentioned before, the process a business broker takes is much more passive. The proactively managed process of M&A advisors and investment bankers tend to add a lot more value. Investment bankers and M&A advisors typically buy and sell companies to/for institutional companies, family offices, other mid to large size companies, private equity funds and occasionally the high wealth individual. The transactions at this size and stage of the market tend to be much more complex. The required level of sophistication, deal experience and understanding in corporate finance is not found at the lower-end of the spectrum. It is often that these professional provide non-transactional value. In many cases, these groups have worked with companies in similar industries or comparables sizes. They have seen common challenges and growth strategies that work. A polished professional may enlighten management with operational changes that could improve the company prior to a sale.
Which Group is Right for You?
Hopefully, the information above has allowed you to whittle down your choice to one. There are many questions you can ask to determine which group will be the best fit. However, here are 3 simple questions you can ask yourself to help determine if you should use a Business Broker, M&A Advisor or Investment Banker:
1. What is the size of transaction I expect when selling my company? (It is important to have realistic expectations and a basic understanding of the value you have in your company. Most industries and businesses have an average valuation multiple in the range of 2.5x to 3.5x EBITDA. Simply, take your EBITDA x by industry average multiple to get a range on your transaction value. If your business falls under the $1 million dollar threshold then you should probably consult a broker or list your company yourself on a business classified site. If you are close to $1 million or north then you will likely get more value if you team up with an experienced M&A advisor.)
2. Who might buy my business? (If the best candidate to buy your business is a local entrepreneur or businessman then you should look for a local business broker. If your business seems like a fit for a national or international private equity firm, larger corporation, or family office then a M&A advisor or Investment Banker is likely best for the job. In the end, you want to make sure that the professional you choose will have the ability to create the best market possible. When this is done right you have a greater chance for a premium multiple leading to a higher valuation.)
3. How much help will I need/want in selling my company? (Thoughtful planning and preparation on your end will lead to increased success on the backend. If you need very little help to prepare financials, marketing material then a Business Broker might make the most sense. If your business is complex and/or you will need help forecasting financials you should choose a M&A Advisor or Investment Banker. In the end, you will want to make sure the buyer understands the value of your company.)