If you’re planning to buy a business, fund an expansion, or merge with another business, the right advisor can make the process easier. When you dip your toe into the advisory pool, it’s easy to feel overwhelmed by the many choices. In most cases, one option is the superior one for achieving your goals, based on the type of transaction, the size of the transaction, or the industry in which you do business.
Here’s how to compare the options and deice which you need.
Brokers vs. Advisors vs. Bankers
Most people never hear about business brokers until they’re selling their own business. And when many people contemplate M&A advisors and investment bankers, they can’t help but turn their attention to widely loathed characters like Gordon Gekko. The truth is that today’s advisors are thoughtful and ethical people. Gordon Gekko is little more than a caricature. So, which role does each fill, and how do you know which you need? Some factors to look at include:
- Transaction size: Brokers typically work with smaller businesses—those with values of less than $2 million. Investment bankers work with the largest businesses, with values in excess of $150 million. M&A advisors cater to businesses in the gap between the two.
- Sales process: Brokers typically support a less complicated sale process with fewer regulatory hurdles. Valuation typically involves looking at cash flow, and marketing might mean little more than listing the business online. M&A advisors and investment bankers typically undertake a more involved and complex marketing process, then diligently work to see the deal through to completion.
- Target market: Business brokers usually work with individual buyers rather than large institutions. Investment bankers more typically work with large entities such as big corporations. Airline and bank mergers, for example, are the domain of investment bankers, while business brokers are more likely to spend their time helping businesses transfer ownership from one family member to another. M&A advisors, as above, work in the middle market, targeting smaller corporations and larger family businesses.
- Cost: An advisor adds significant value to a transaction, but that value comes at a price. Both M&A advisors and investment bankers typically charge retainer fees. This ensures they have the bandwidth to support the transaction, even without a sale. Then, if the business sells, they’ll also charge a success fee. Brokers have a simpler fee structure. In most cases, you’ll pay a success fee of 5-10 percent of the total sale price.
Making the Right Choice
Choosing the right advisor requires you to be honest about what your business needs and how valuable it likely is. If you think due diligence might be long and complicated, interview some investment banking or M&A advisory firms. But if the transaction is more straightforward and the total anticipated value is a little lower, a broker may offer the best value at the lowest price. Try interviewing a few different advisors to gauge their interest and ask what they bring to the transaction. Doing so may help clarify your options.