Should I hire an Investment Banker, M&A Advisor, or Business Broker?
There comes a time in the life of every entrepreneur when a business transition is an inevitable reality. When this time comes, there are plenty of questions that need to be answered.
What is the valuation of the business?
What is the timing for the business sale?
Should a succession planner be hired to increase the company’s value prior to the sale?
The most important question that will be essential in maximizing the negotiated value of the business revolves around whether the owner should hire an investment banker, M&A advisor, or business broker? Understanding the difference between a merger and acquisition advisor, a business broker and a middle market investment banker is key in determining the proper course of action.
Size of the Transaction
The biggest difference between merger and acquisition advisors, investment bankers and business brokers are the size of the transactions they engage in. Business brokers advise on the sale of some of the country’s smallest businesses (SMBs). Many business brokers are like commercial real estate agents, working with companies that own main street businesses. In these cases, they might work to secure a small business loan for acquisition financing such as SBA financing. Most of these companies have a listed purchase price.
Business brokers typically sell companies 100k – $10MM. These businesses are typically one owner selling to another owner and those owners work in the business as their “job” as well as ownership.
M&A advisors typically work with companies that might be a little larger. The companies typically have Revenues of $10MM – $20MM and earnings of $1MM to $2MM/year. These transactions may outstrip Main Street and SBA financing due to their size so the M&A advisor may serve the role of arranging some financing, but most are not securities licensed so therefore consult with the owner to arrange financing. M&A Advisors also coordinate among a wider management team due to the size of the business.
Investment bankers will typically work with companies whose EBITDA (earnings before interest, depreciation & amortization) are above the $3MM mark and typically above the $5MM level and are often Licensed to do securities work as well as maintain relationships with institutional investors and debt and equity players. Investment Bankers typically run auctions and a time limited sales process to increase competitive bidding. Purchase price is never offered, and investment bankers “bake-off” a field of buyers to get to a winning bidder.
Industry Expertise
Investment bankers are also much more focused on particular industries and market niches. Business brokers are generalists by nature, working for companies across a very broad spectrum from healthcare to manufacturing. While the process can be replicated across markets, there is specific expertise that comes from knowing market multiples from direct experience, knowing buyers in the market, particularly those that are willing to pay more.
Transaction Complexity
In general, deals performed by investment bankers are more complex than smaller deals. They require greater legal, accounting, finance, and tax assistance from a myriad of trusted advisors for the transaction. In fact, there are many middle-market companies that will nearly require the niche expertise that an investment banker may hold when it comes to doing a deal. Most experienced bankers hold years of experience in very tight, specific niches including manufacturing, healthcare, software & technology, real estate & commercial construction, internet, advertising & media, shipping & logistics and oil & gas.
Licensing & Legal
Perhaps one of the most pressing issues and reasons a business seller would decide to choose an investment banker over a business broker or merger and acquisition advisor is because investment bankers are required to hold requisite FINRA licenses. Working with an advisor that holds the requisite licenses helps to protect both the issuer and the advisor, especially in the event that legal action is eventually taken against the company or its advisors. This is especially true when it comes to raising capital for business growth. In many instances, investment banks will also have internal legal counsel that is experienced in both SEC and FINRA rules in individual transactions. Each of these components increases the benefits of using an investment bank over a local boutique M&A advisory shop.
Making the decision to sell a business is something that is not done lightly. When doing so, it would be wise to assess all the options in not only the type of advisor you use but also to understand the specific expertise and experience your broker M&A Advisor or Investment Banker has. For more on how to select your investment bank or investment banker see this article.
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