Every business owner knows that the right team makes a difference. This is also true when you’re ready to sell your company. For owners of lower middle-market companies, choosing the right type of advisor—and balancing the expense of hiring an advisor with the value they confer—can be both confusing and frustrating. In most cases, you’ll choose between M&A advisors, investment bankers, and business brokers.
Business brokers usually work with smaller companies that are selling to an individual buyer or transferring ownership to an employee. The process is similar to that of a real estate listing, and so are the terms. The valuation usually depends on the seller’s discretionary earnings. The broker markets the company by collecting basic information and then marketing it on various websites. In most cases, the sale follows a template, and involves transferring the company’s assets. Business brokers tend to be more affordable, but also provide fewer services, so are the superior option for less complex transactions.
M&A Advisors and Investment Bankers
M&A advisors and investment bankers exist along a continuum, offering substantially similar services but to different degrees. In most cases M&A advisors bridge the gap between large transactions with values in excess of $250 million and smaller transactions for which business brokers are a clear fit—usually those valued at less than $2 million.
Investment bankers offer a wider range of services and tend to work with public companies, and those with complex needs such as those that require formal licensing of broker-dealers. Most lower middle market transactions to not require this kind of licensing, but the specific needs of the transaction depend on SEC regulations, the nature of the business, and similar factors. In general, investment bankers earn the majority of their paycheck from a success fee. This fee usually establishes the value floor below which they will not work.
M&A advisors act as deal partners, and often work with clients to prepare them for their exit. They may help with succession planning and liquidity maximization.
Both advisors and bankers run a competitive, proactive process that aims to sell the business along a specific timeline. The process business brokers offer is comparatively more passive. M&A advisors and investment bankers can add considerable value, and they usually pay for themselves. So it’s important for sellers to view their pay as an investment in the transaction rather than a transactional cost.
M&A advisors and investment bankers normally work with sellers planning to sell to institutional investors such as PE funds, or large companies. This too requires a more involved process, including help with regulatory issues. Transactions in this sector of the market are involved and complex, and the skills involved in selling a smaller business may not translate well at this higher echelon of the spectrum. So sellers of larger businesses must ensure that, no matter whom they hire, that person has significant experience in corporate finance and a keen understanding of the regulatory environment in which the business operates.