12 May Business Broker or M&A Advisor?
The term “business broker” is just a phrase, as are “M&A advisor” and “investment banker,” but the term “business broker” is characteristically used to refer to brokers of businesses valued under $1 million. Business brokers generally serve buyers and sellers of “main street”-type businesses located in their immediate geographic area. Examples of main street businesses are dry cleaner, gas station, convenience store, restaurant, laundry, lawn care, landscaping, nursery, repair shop, beauty shop, individual franchise, and many other business-to-consumer operations with a single location.
Business brokers typically represent businesses that are managed/run by the owner himself or herself, resell products made by others (not their own proprietary products) or are a franchisee or licensee, and have little expansion potential. Businesses offered by business brokers rarely sell for more than four times proven annual cash flow.
The most likely buyers for main street businesses are individuals that live near the business, and the buyer will typically work in the business. Buyers of main street businesses often have never owned a business or been involved in the purchase or sale of a business before, and tend to have little knowledge of business transactions, financing, etc.
“M&A advisor” is a term generally used to refer to consultants that represent owners of businesses valued greater than $1 million. These businesses may be multi-unit retail establishments, dealers or franchises, but are more often manufacturers, distributors or service businesses with regional, national or international clientele.
Businesses represented by M&A advisors may have a separation of ownership and management, and will almost always have some middle-management personnel.
Businesses represented by M&A advisors will typically have greater expansion potential, and will have a higher likelihood of having a proprietary brand(s) or product(s).
Businesses offered by M&A advisors have greater potential for garnering higher earnings multiples.
Buyers of businesses represented by M&A advisors may be individuals (at least on the smaller size deals), but are more often other companies and/or private equity groups.
Buyers of M&A advisor-represented businesses have typically owned and/or purchased and sold companies before. They also tend to be well-educated, well-connected and fairly experienced in business matters. As such, these buyers can be pretty savvy. To that end, sellers of mid-size companies should engage representation that has commensurate education, experience and skill.
Business brokers typically provide their services in a manner similar to real estate brokers, listing many businesses and advertising them locally and on the web. Business brokers will typically do little buyer search outside of web postings and newspaper advertisements, and almost no direct prospecting to select buyer candidates. Business brokers typically spend less time per deal, when compared to the time the M&A advisor will spend on a deal. These are not criticisms of business brokers or the way they typically operate. It’s a function of the nature of the business brokerage business. The deals are smaller so the fee per deal is smaller so they must work on an close more deals.
M&A firms tend to operate more like a consulting firm. M&A firms will rarely advertise their “opportunities” in their local area, and will do little or no mass marketing. Instead, M&A firms conduct targeted buyer searches to buyers who have demonstrated interest in opportunities of the type being represented.
M&A firms typically have fewer engagements than the business broker, and spend considerable amounts of time on each deal.
Business brokers will charge a commission of up to 15 percent of the transaction value, and little or nothing up front.
M&A firms typically require sizeable retainer fees to offset the risk associated with the substantial amount of work that must be done up front researching the industry, packaging the business and preparing it for sale, proactively contacting and working with buyers, and managing the deal through to closing. Retainer fees can be lump-sum, up-front amounts ranging from $10,000 to $40,000 (don’t you fall for that though), or a commensurate amount paid over the initial months (preferable).
Back-end or “success fees” for M&A deals vary widely depending on the size and complexity of the transaction but tend to be a lower percentage of the transaction value, ranging from 2 percent for deals above $75 million to 7 percent for deals under $10 million.
The “who to hire” decision is largely determined by the type of business you own. If you are selling a company that has less than $500,000 in annual earnings, you’ll want to hire a business broker. There will be little or no up-front cost, and their listing service should adequately serve your needs. An M&A firm would not be as skilled at representing you given they don’t work with buyers that want businesses valued under $1 million.
Consider the cost benefit. An M&A firm will charge significant fees for representing your business. The good news is that a skilled M&A advisor will more than pay for himself or herself though a maximized sale price.