Smith Holland M&A Resources
How are business brokers different from M&A advisors and investment bankers?
After you’ve made the decision to sell your business, choosing the right team can make all the difference in the end. Before we get into the differences between business brokers, M&A advisors and investment bankers, we recommend considering how the real estate industry works. There are commercial real estate brokers and there are residential real estate brokers, with many different subsets within each niche. If you were selling a house, it wouldn’t make sense to call a commercial real estate broker that only sells commercial properties. Just as it doesn’t make sense to call a real estate agent that only focuses on selling residential condo units if you’re selling an empty lot that’s suited for a manufacturing warehouse. Maximizing shareholder value in any large transaction will be dependent on hiring the right team that has expertise in the exact type of asset you’re selling.
When it comes to selling a business at the lower middle market level, there are many options to choose from including business brokers, M&A advisors and investment bankers. At Smith Holland, our firm is an international M&A advisory and the information below breaks down the differences between the professionals that help facilitate sell-side transactions.
BUSINESS BROKERS – Business brokers typically work with smaller companies that have $3M or less in annual revenues. The types of businesses that most business brokers work with are traditional Main Street business including restaurants, gas stations, retail shops, convenience stores, etc. Additionally, most businesses that are sold through business brokers are acquired by individual buyers instead of private equity buyers or publicly traded corporations. The process that most business brokers take for selling a business is referred to as the ‘post it and forget it” strategy where the business broker posts your business for sale on various online business marketplace websites and then they wait for a buyers to come to them. The process is very similar to how residential real estate agents list houses for sale and considered more of a “passive” strategy as opposed to a proactive targeted outreach approach. Most business brokers tend to work alone (even if they are apart of a multi-member firm), which means you usually don’t get a team-driven approach with business broker listings. Business brokers usually use earnings multiples ranging from 1x – 3x the annual SDE figure (Seller’s Discretionary Earnings). Using a business broker is usually the best option for companies with less than $2M in annual revenues and just like with residential real estate agents, there are business brokers with specific focuses, i.e. website business brokers, healthcare business brokers, travel agency business brokers, etc. In summary, the definition of a business broker is a professional that advises on smaller deals for companies with less than $3M in annual revenues. There are only a handful of states in the United States that issue what’s referred to as a “business broker license” (or registration), with about half of the states requiring business brokers to have a real estate license to advise on the sale of a business. For example, a business broker can not sell a business in Florida without being a licensed real estate agent, even if the business being sold does not include real estate.
M&A ADVISORS – The main differences between M&A advisors and business brokers are transaction size and service offerings. Middle Market M&A advisors only advise on transactions for companies with at least $3M or more in annual revenues. While M&A advisors and investment bankers are similar in terms of their service offerings, M&A advisors cannot participate in transactions where financial securities are being issued for public companies as that process requires a special FINRA license, which is where investment banks come in. M&A advisors typically provide a higher level of service compared to business brokers, especially when it comes to preparing the company financials and CIM for the market and sourcing qualified buyers. While business brokers take a “post it and forget” approach to generating buyer interest, M&A advisors take a much more involved approach to creating a competitive bidding environment. This starts with the M&A advisors building a list of ideal acquisition candidates and then proactively reaching out to those potential acquirers with a bespoke value story that is custom tailored to each buyer on the list. Additionally, M&A advisors take a more involved role in managing the due diligence process and drafting the various contracts that are used to facilitate the transaction. While business brokers typically work with individual buyers, M&A advisors routinely work with private equity firms, institutional buyers, publicly traded companies and global buyers that commonly make acquisitions.
INVESTMENT BANKERS – In terms of professionals that help facilitate the sale of businesses, investment bankers are the highest level in the industry. Investment bankers offer a much broader range of services including valuation assessments, initial public offerings, fairness opinions, exit strategy evaluation and more. All investment banking firms are required to be licensed broker-deals with FINRA, which ensures the can advise on the most complex transactions. Investment bankers typically work with the largest companies in the world and while they occasionally work with middle market companies, it is rare for investment bankers to facilitate the sale of middle market companies, especially companies in the lower middle market. The fee structure for investment bankers also differs from M&A advisors and business brokers as most investment banks have a minimum required threshold for fee expectations, which puts their services out of reach for most middle market companies.
In summary, all 3 types of financial professionals help to facilitate the sale of a business. Deciding which team is right for your business will ultimately depend on transaction size and the level of service you expect to see from the team you hire. Going back to the real estate example above, most people choose the type of real estate broker to hire based on the broker’s area of expertise. A real estate broker that specializes in selling small single family homes in the suburbs of Chicago probably won’t be as effective as a real estate broker that focuses exclusively on high-end condos in the downtown area when it comes to selling your penthouse in Manhattan. The same rules apply for hiring the right team to sell your business and at Smith Holland, our M&A advisors have the global reach and industry expertise needed to sell your middle market company for top dollar.
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