If you’re looking to acquire a business, merge with a competitor or raise capital to fund an expansion, it helps to have an advisor on your side to guide you through the process and lend their expertise to your strategy.
The process of selecting who to work with can confuse all but the most experienced and savvy business owners and executives. Between business brokers, mergers and acquisitions advisors and investment bankers, the list of choices is practically endless. But it’s likely that one option is better suited to your goals than the other, whether that be by type or size of the transaction you’re pursuing or the industry in which you work.
The majority of businesses don’t need — or want — Wall Street investment bankers lending their strategic advice to the M&A process. But for others, investment bankers might be the only logical route. Here’s a closer look at what kind of help business brokers, advisors and investment bankers offer and how to determine which is best for your business.
Business Brokers vs. M&A Advisors vs. Investment Bankers
Many people have never heard of business brokers. Others may have heard the term without knowing what it means. Is it someone who sells your business on CraigsList or drops an ad in the newspaper? Not quite.
There are similar misconceptions about M&A advisors and investment bankers. When the general population thinks M&A advisors and investment bankers, many call to mind the character Gordon Gekko portrayed by Michael Douglas in 1986 film Wall Street as what a banker looks and acts like.
In reality, the Gekko character was a corporate raider based in part on American financier Asher Edelman. While the worlds of corporate finance and investment banking are intertwined, the likelihood that any business owner would be lectured by an advisor that “greed, for lack of a better word, is good” is low.
So, how do we define the roles of business brokers, M&A advisors and investment bankers? Transaction size, target market, strategy and cost are a few of the factors that can help narrow down which is right for you.
Let’s start with the basics. The easiest way to start defining these various roles is to separate them by transaction size. These aren’t hard-and-fast rules but should give you a starting point when evaluating which option best suits your needs.
Typically, business brokers work with smaller businesses involved in transactions of $2 million or less. Investment bankers occupy the other end of the spectrum, where deal size is $150 million or greater. M&A advisors, then, fill the gap between the two.
While these are general guidelines, they don’t paint the full picture. Let’s dig deeper.
Business brokers generally help sell a business to an individual buyer rather than an institution. Businesses range across various industries but rarely involve large corporate entities.
Investment bankers deal mainly with corporate entities and institutions. When you think about large airline mergers, for example, these transactions are handled by investment bankers. The larger the transaction, the more bankers get involved. When Continental Airlines merged with United Airlines in 2010, the parties were advised by four teams of bankers. JPMorgan Chase and Goldman Sachs on the United side and Lazard and Morgan Stanley on the Continental side.
The lines blur a little for M&A advisors, who deal with both smaller corporations and private businesses.
The sales process facilitated by business brokers is typically less complicated and has fewer regulatory hoops to jump through. Valuation in deals handled by business brokers is typically determined by the business’s cash flow and many brokers choose to market companies on websites in order to open the business up to the widest audience.
Once an interested party reaches out to a business broker, the process can begin with a simple non-disclosure agreement (NDA) and quickly move toward a completed sale. There’s sometimes a little wiggle room for negotiation but not much.
When transactions have the potential to be more complex, M&A advisors and investment bankers get called in. A complex transaction could involve long-term strategic plans, regulatory requirements or large, dynamic investments using both equity and debt.
Both offer similar services, including strategic consultation and fairness opinions. Their sales processes are a bit more proactive than business brokers and valuations often include variables like intellectual property and future potential. Competitive bidding and controlled auctions are common sales strategies that can result in higher payouts than typical valuations can predict.
While the services of an M&A advisor or investment banker might sound appealing, you’ll pay for the privilege. Both M&A advisors and investment bankers can charge retainer fees for their services throughout the sales process and often have complex fee structures with minimum fee expectations.
One of the benefits of a business broker is the typically transparent and straightforward fee structure — somewhere in the region of 5% to 10% of the overall sales price.
Which Do You Need?
This is where it pays to be honest with yourself.
If you anticipate a lengthy due diligence process, complex financing or the potential need for regulatory approval, it might be a good idea to interview some M&A advisory or investment banking firms to see where they might benefit you.
On the other hand, if you’re looking to sell your restaurant, farm, website, retail shop or any other small- to medium-sized business, chances are a business broker is perfect for you. In fact, it’s unlikely an advisor or banker would even return your call if you asked about their services.
Business brokers may not sound as exciting as fancy bankers but if your business is valued less than a few million dollars, you’ll be saving yourself a lot of time and money by going with someone who knows your market and can facilitate your transaction.
Ultimately, any business owner should be targeting an efficient, painless transaction. Where your business fits in the advisor spectrum is for you to decide, but consider which option is mostly likely to provide you with the best possible outcome.
Bruce Hakutizwi is the U.S. and International Business Manager for Dynamis Ltd., the parent company of us.BusinessesforSale.com, one of the largest online global marketplaces for buying and selling small-to-medium-size businesses. Bruce is passionate about helping entrepreneurs succeed and regularly writes about small business growth, buying and selling businesses, succession planning, and business valuation. Connect @BizForSaleUS.