Everything You Need To Know About Business Brokers
When the time comes to sell, many business owners assume the best thing to do is to pick up the phone and call a business broker.
Sometimes, that’s a great idea — because, well, business brokers do sell businesses.
But a business broker isn’t the right choice for everyone. Depending on the size of your company and your personal, financial, and corporate objectives, an investment banker or M&A advisor might be a better fit, and they can ensure that you meet your objectives without leaving any money on the table.
So how do you know who to call when a transaction is looming? Here’s a quick rundown on business brokers: what they do, how they work, and whether a broker is the right partner to help you achieve your goals.
What is a business broker?
In some ways, business brokers are kind of like realtors. Just as a realtor helps homeowners buy and sell houses, a business broker helps business owners buy and sell businesses.
Business brokers may operate independently or as part of a larger brokerage firm. Sometimes, they’ll focus on companies that generate certain revenues (often $5 million or less) or that operate in certain industries. Their goal is to sell a business quickly — but they won’t necessarily run a full process to ensure you’re maximizing your value.
Because they work with smaller buyers and sellers, it’s typical for business brokers to help businesses sell primarily to individual buyers, versus a private equity buyer or a strategic/corporate buyer.
Business broker fees can vary, but they’re typically a percentage of the ultimate purchase price.
How are business brokers different from investment bankers or M&A advisors?
Like business brokers, M&A advisors and investment bankers help business owners buy and sell businesses. It’s worth noting that:
- The term “investment banker” is a bit of a misnomer — investment bankers don’t invest in companies, and they don’t loan money.
- When it comes to buying and selling, investment bankers and M&A advisors take a similar approach. However, investment bankers may offer other services, like restructuring and turnaround management, fairness opinions, and public offerings.
There are no hard-and-fast rules when it comes to comparing business brokers with investment bankers and M&A advisors, but here are some generally accepted differences.
1. COMPANY SIZE
Again, there are exceptions — but it’s not unusual for business brokers to focus on serving smaller companies. When we say “smaller,” we’re referring to companies with revenues under $5 million. The sale of these businesses can be fairly straightforward; it’s simpler to sort through financials and determine value objectively, and it may not be worth running a full process for these kinds of companies. If that’s the case, a business broker is likely a good fit. (More on “full process” below.)
Investment bankers and M&A advisors tend to work with slightly larger companies whose financials and operations are more complex. They also may be licensed under securities laws and work in tandem with corporate attorneys.
2. STRATEGY AND CONSULTING
If you engage a business broker, you’re hiring them to broker a transaction — and not necessarily to advise you on whether a transaction is the right move for you. Think about it this way: you probably wouldn’t call a realtor to help you decide if you want to stay in your house or move somewhere else. Sure, they may be able to give you some general guidance around timing or market conditions if you’re on the fence, but most of the time, you’ll call a realtor when you’re ready to put your house on the market. The same generally goes for business brokers.
On the other hand, while investment bankers and advisors certainly work with business owners who are ready to move forward with a sale, they’ll also help clients who are at a crossroads and are truly unsure as to whether a transaction is the best way to accomplish their short- and long-term goals.
Investment bankers act as a consultant on the front end, helping clients think through their ultimate objectives. Do they want to retire? Do they want to stay with the company but take some chips off the table? Do they want to make sure their employees are taken care of? Investment bankers will then dig into every aspect of the company, the industry and the market to advise on the right kind of transaction, buyer and terms.
Finally, unlike business brokers, investment bankers will work with clients who know they want to transition their company eventually, but not right this minute. Here again, they take a consultative approach — in this case, helping business owners “get their house in order.” For example, they’ll identify factors that can detract from a company’s value, like high customer concentration or outdated IT systems, so that owners have time to address those issues before taking their company to market. This can lead to significantly higher multiples.
A business broker’s process looks very different from the sell-side process of an investment banker/M&A advisor.
Many brokers “list” businesses for sale with an asking price that they’ve agreed to with their client (again, similar to a realtor selling a home). They’ll market the business, sometimes advertising it on websites intended for that purpose, and then negotiate the price with interested buyers on behalf of the seller. They may use standard templates or forms to complete the sale of the business — which is often simply the sale of the company’s assets. In general, the process is straightforward and relatively passive.
On the other hand, investment bankers/M&A advisors ultimately want to create a confidential, competitive auction for the business, selling to the highest bidder — or to the buyer who offers the most attractive terms (i.e., those that align with the business owner’s objectives). In order to do that, they need to run a full process. [LINK TO EBOOK]
That means they’ll take time to learn about every aspect of the business: history, industry, financials, operations and assets, management team and employees, and more. They’ll compile all of this into a confidential information memorandum (CIM), a write-up that positions the company in the best light and proactively contact select buyers that represent the best fit and most likely buyers for the business.
The goal is to attract multiple serious, high-quality buyers who compete to buy the company, driving up the purchase price.
4. TYPES OF BUYERS
Business brokers may have access to a robust network of buyers. Assuming they’re brokering smaller deals, their buyers tend to be individuals.
Investment bankers/M&A advisors also have robust buyer networks, but those networks tend to be a mix of:
- Strategic buyers — operating companies, like a competitor, or a supplier/customer that’s looking to become vertically integrated
- Financial buyers — private equity firms or individual buyers that buy companies for a financial return
- Hybrid buyers — strategic companies owned by private equity
- Family offices — investment groups composed of high net worth individuals or families that typically made large sums of money by operating companies in the past.
Gaining access to these “sophisticated,” well-financed buyers (that can pay higher multiples) is one of the big advantages to working with an investment banker.
5. FEE STRUCTURE
Business brokers usually charge a commission based on the ultimate purchase price. This varies widely, but often ranges from 8% to 15% percent.
Investment bankers and M&A advisors have different types of fee structures, but it’s common for them to bill a monthly retainer. If a deal is completed, the seller will pay a success fee on the total deal value. The success fee may be structured in such a way that incentivizes your advisor to get the highest possible purchase price — i.e., the higher the price achieved for the business, the greater opportunity for potential “bonus” payments to the advisor.. This creates a win-win scenario for the seller and the advisor.
How do I know if a broker or investment banker/M&A advisor is right for me?
If you’ve read to this point, you probably have a general idea of whether a broker or an investment banker is the right choice for you. If you’re still unsure, run down this list of questions:
What are my revenues? If you’re generating revenues of at least $5 million, you should consider speaking with an investment banker first.
Am I sure that I’m ready to sell my company? A business broker is going to be 100% transaction-focused, and the deal they structure typically involves the full sale of your business. An investment banker/M&A advisor can provide guidance around your best move and help you put together a strategy, which may or may not involve the full or partial sale of your business.
Are there certain objectives I want to achieve beyond income replacement? Business brokers structure and negotiate straightforward deals; essentially, the transfer of assets from one owner to another. Investment bankers can help you think through a variety of creative ways to structure a deal that suits the needs and wishes of you, your management team and your employees while maximizing value.
Do I want to create an auction for my company? A business broker will advertise your business with a certain asking price. An investment banker will market your business with the goal of attracting multiple bidders, who ideally will compete to buy your company at the best market price.
Want to learn more about current market conditions, selling a business or running a process? Contact us!