You may have heard you need a business broker or M&A advisor to help you sell your business—that’s right. It’s tough to sell a house alone (as a for sale by owner), although it’s even tougher to sell a business without assistance. For a very simple, inexpensive business, you may be successful. But the larger the deal or more complex your business is, the less likely you are going to sell without the help of a business broker or M&A advisor (sometimes called an investment banker).
You may be wondering about the difference between the two – business brokers and mergers and acquisitions (M&A) advisors—that’s a fair question. They are called different things and generally, to an outsider, appear to be entirely different roles in the M&A world. Fundamentally, though, business brokers and M&A advisors are very similar. They both help business owners market and sell their businesses.
Business brokers (occasionally called business transfer agents or intermediaries) assist buyers and sellers in buying and selling privately-held businesses (privately-held businesses are all businesses that aren’t publicly-listed on a stock exchange). Business brokers generally operate in the “main street” part of the M&A market – businesses changing hands for $2 million or less.
M&A advisors (also called investment bankers) represent acquirers and sellers of larger businesses. And, notice I used the word “acquirer” rather than “buyer.” That’s because M&A advisors have a different vernacular. They don’t have business “listings.” Their marketing and sales process is focused on direct marketing—compiling a list of prospective acquirers and reaching out to them directly to assess interest.
M&A advisors tend to slot into different sections of the marketplace based on deal size and sometimes industry focus. Large, multi-national investment banks (sometimes called “bulge bracket” investment banks) handle deals in the hundreds of millions up to billions of dollars, including mergers and acquisitions of public companies. Boutique banks (Evercore and Lazard are examples) work in deals in the tens of millions up to the hundreds of millions. And there are in-between players and smaller regional players.
WHAT DO BUSINESS BROKERS AND M&A ADVISORS DO?
Regardless of what they call themselves and the terms they use to describe the business sales process, business brokers and M&A advisors perform similar tasks. The advisor you choose will likely perform all the following actions:
- work with you to prepare your company to be sold;
- value your company;
- create the seller sales documents (presentation, offering memorandum);
- market your business to prospective buyers;
- pre-screen buyers;
- negotiate the letter of intent/term sheet and structure of your deal;
- advise on due diligence questions;
- coordinate with your legal counsel and other advisors;
- manage the closing process, including communicating timelines; and
- help get your deal to the closing table.
Business brokers don’t handle a lot of buyer representations. They can, there is just less of that business. Most buyers in the main street part of the market look for businesses to buy on their own by visiting the various websites where business brokers list businesses for sale.
M&A advisors (investment bankers) have more buyer representation engagements since finding companies for sale is more challenging with larger companies (i.e., they aren’t listed for sale online) and many purchases of larger businesses are “serial acquirers,” which means they’re consistently buying up companies. Serial acquirers like to have advisors out scouting for opportunities
WHAT AND HOW DO BUSINESS BROKERS AND M&A ADVISORS GET PAID?
Some brokers work for an hourly rate. Rates vary wildly, although you can expect to pay somewhere between $100 to $200 per hour for a quality broker working on an hourly basis. When it comes to business brokers, hourly billing is the exception, not the rule. However, some brokers feel like their time is valuable to a seller whether or not the business sells and that they deserve to get paid. Also, if a broker thinks a business may possibly sell, but will not be in demand, they may only be willing to take the engagement on an hourly basis. Hourly billing is tough from your perspective as the seller because it’s hard to know exactly what is being done and why. If you consider an hourly engagement, be sure to clearly lay out what the broker is going to do, why and what you should expect to see as far as results.
Paying on contingency – only if and when your business sells – is attractive to most sellers. No one loves to pay service fees for deals that don’t happen. And, it’s great to have advisors who have the same interests as you—closing the sale of your business. However, keep in mind that when someone only gets paid if your deal closes, they will want your deal to close – they will be particularly invested in your deal closing, which could possibly affect their advice to you. This shouldn’t be a reason to never consider an M&A advisor contingency arrangement (after all, that type of structure is the most common in our experience). An ethical business broker will not tell you something that isn’t true or push you to close a bad deal. However, they may just be a little less inclined to point out the negative aspects of a transaction than if they weren’t paid on contingency. This is all just stands to reason—it’s difficult to entirely separate the advice of many people from their motivations (not to mention their experience and approach to doing things).
So, choose an advisor carefully (we’ll get to how to do that in just a moment) and also know what you want and have the confidence and knowledge to be sure your M&A advisor and the other members of your deal team (including an M&A lawyer) are working for you and taking your lead in the process when it comes to making key decisions – this is your business sale and you should be as involved in how it goes as you want.
Success fee commissions range from 5% to 15% of the sale price, which includes all cash payments and the value of any seller financing. Usually, the smaller the transaction, the larger the commission. Businesses with enterprise value between $100,000 and $1,000,000 can expect commissions to average between 8% to 12%. Commissions are determined between the seller and their broker or advisor, and they are often deferred until the closing of the sale.
PAYING RETAINERS TO M&A ADVISORS AND BUSINESS BROKERS
Many M&A advisors and some business brokers require an upfront payment to begin representing a seller. The reason for this is that they’re about to embark on a lengthy process of marketing and selling your business—one that may have no payday at the end, depending on the business and what you’re looking for—and they want to be sure you’re committed to selling and committed to the process. Plus, the initial portion of a seller representation is a lot of work—digging into the company, preparing the sales presentation documents, and marketing to buyers. We can tell you from experience that putting 100% of your effort into the early part of the M&A makes great strategic sense, and it’s more attractive when a seller is willing to invest some small amount of money into the process. Our upfront fees are nominal, in the grand scheme of things, although to us they are a very important part of knowing you’re committed to helping get your business sold and to giving us the resources to justify a large amount of time we put into preparing the business to be sold and developing sales documents.
WHO DO BUSINESS BROKERS/M&A ADVISORS REPRESENT?
Business brokers may take greater liberties in structuring their engagements, including acting as a pure intermediary and not representing either one or the other party.
Some business brokers work as dual agents, which is also sometimes referred to as a limited agency. A broker acting as a dual agent represents both the buyer and seller as an agent. While individual state laws vary and interpret dual agency rather differently, a dual agent may owe fiduciary duties to both the buyer and seller. Fiduciary duties are a high standard of care. An advisor who owes fiduciary duties to their client must be honest, transparent, fair, and disinterested—in other words, they must have your back.
Dual agency can be challenging. A dual agent may gain some confidential information about each party that might impact negotiations. While an ethical and competent dual agent will be very careful to not share your confidential information with a prospective buyer, just the fact that they have confidential insight into what you’re willing to do or not do (pay or not pay) may affect your negotiating ability. If you disclose to a dual agent the minimum price you’d accept but instruct them to get the maximum price the buyer will pay, your dual agent may, without even intending to do so, lead the buyer to a lower price knowing that the deal will get done there.
Not every broker works as an agent for one of the parties. Some business brokers act as transactions brokers. A transaction broker represents neither party as an agent but instead deals with both parties in the same way to facilitate the transaction. If you work with a transaction broker, you must be very careful never to share confidential information. Unlike a dual agent, the transaction broker may not have the same legal or practical restrictions on what gets shared with the buyer.
Some U.S. states have laws that govern business brokers. Some of these statutes require that business brokers be licensed or specifically define the nature of the business broker’s representation. If that’s the case, you may not have complete freedom to choose how to structure the representation. Generally, though, you will be able to determine if you want a broker that represents just you or operates as an intermediary or dual agent.
There is no right or wrong choice to how you structure a broker’s role. Some sellers prefer to have an agent who is watching out for their best interests and only their best interests, while other sellers are comfortable having a middleman who is motivated to get the deal done and works collaboratively to do so.
While business brokers may be more flexible in structuring mergers and acquisitions, M&A advisors are generally very intentional about identifying their client, and most M&A advisors will only represent either the buyer or the seller in an M&A transaction.
M&A ADVISORY AND BROKERAGE SERVICES
The services of a business broker or M&A advisor vary widely depending on the interests and skill set of the broker or advisor and what you hire them to do. The key is to find someone who will be your ally, and it’s critical that you understand exactly what they will do and won’t do.
Once engaged, a business broker helps prepare the company for sale and tries to find a buyer. Business brokerage services vary widely depending on the interests and skill set of the broker and what you hire (and pay) the broker to do. I listed three major categories of broker services earlier – preparation, marketing, and closing. Each of those categories may include dozens of various services. When preparing your company for a sale, a business broker may help you value your company, screen for deal risk factors, organize company financials and other records, and prepare the Confidential Information Memorandum and Teaser (or seller presentation/marketing materials that go by different names).
Regarding valuation, many business brokers are well versed in business valuation. A broker may help you develop an MPSP (Most Probable Selling Price). Most business owners do not have a good sense of the value of their businesses. Those that think they do are often mistaken. It is critical to have reasonable expectations as to the sale price. It is possible that the MPSP is so low that you don’t want to sell your business right now. On the other hand, you may have had your head down while building the company and don’t realize just how much value you’ve created. Obviously, this information will help you make a decision about whether to sell and determine what to ask or expect for the business.
Business brokers and M&A advisors who truly understand business and really know how buyers think may be of tremendous assistance in screening for potential issues that might derail a deal. Certain typical issues, such as high customer concentration (i.e., a small number of customers account for a large portion of total revenue) can only be cured through sales and operations. Other concerns, including a lack of recurring revenue, require a company to revise its product and service offerings. Companies with very little recurring revenue can be acquisition candidates, although it is tough and they will not command great purchase price multiples.
However, another common concern of buyers is that the business will not run well without the current owner’s involvement. This concern is not addressed solely by agreeing to stay involved as a consultant for some period of time post-closing. The consulting arrangement may help, but the bigger concern is often that the company is built around the owner. Eventually, you will move on. Even if you promise to stay and work with the acquired company as long as the buyer wants, the buyer will have no guarantee that you will actually do that or that you won’t want very high compensation for your efforts, knowing that the buyer does not have a lot of room to negotiate.
If your current operations are likely to prompt concern from prospective buyers about your essential involvement, a sharp broker can help you brainstorm tactics to address the concern. The solution may be as simple as coaching you to take yourself out of the day-to-day processes and information flow. A great broker, M&A advisor, or consultant will spot this issue from a mile away and help walk you through it. It may not be easy to head off this concern, although it can often be done.
For most deals, business brokers and merger & acquisition advisors spend the vast majority of their time in the marketing step of the process. They will prepare the seller marketing materials, which may include a Teaser, which is a one or two-page executive summary of your business, and the Confidential Information Memorandum (CIM), which, on a smaller deal, might be a seller presentation. For smaller deals, the seller presentation documents should be simpler since you’ll likely be offering the business for sale to less sophisticated purchasers. That’s not always the case, although there is some correlation between the size of an M&A transaction and the experience level of the owners and officers involved.
The teaser is used to gain interest from prospective buyers before they are asked to sign a non-disclosure agreement. The CIM or seller presentation is a more comprehensive document with more substantive information about the business and includes the strengths and opportunities the business faces. While all these documents are fundamentally sales documents, none of them should be misleading and they may be the first opportunity to disclose negative facts to the potential buyers. A great M&A advisor will help you think through how to make negative disclosures. You can’t hide things from buyers—you need to be forthright. However, the timing of disclosing negative facts is something that deserves attention.
Most business brokers utilize a couple dozen different websites to list businesses for sale. These sites are similar to the multiple listing services utilized by real estate agents. Two popular ones are bizbuysell.com and mergernetwork.com. Many brokers operate as part of franchise systems. A few of the larger franchises in the United States are Sunbelt Business Brokers, Murphy Business & Financial Corporation, and Transworld Business Advisors. In addition to website listings, some brokers advertise in business newspapers and magazines.
M&A advisors don’t generally list businesses for sale on the Internet. The reason is that buyers of $5 million+ businesses aren’t typically individuals looking around for businesses to buy on the internet. They often work with corporate development executives and investment bankers to locate companies to buy. And they usually have a good sense of what companies may be acquisition candidates.
Business brokers and M&A advisors (investment bankers) will spend considerable time developing a target buyer list. They will ask you for buyer candidates, leverage their own network and lists of prospective buyers, search online and talk to other brokers to generate interest, and solicit ideas for companies that would make good acquisition candidates. Brokers will then approach these prospective buyers directly to gauge initial interest.
Despite the efforts of a business broker to sell a business directly to a buyer, most main street businesses sell as a result of the online listing services. Unlike real estate, most main street buyers don’t seek buyer representation upfront. They typically begin their search online. There are so many businesses offered for sale online that there is no need to contact brokers for representation and assistance.
For larger transactions in which M&A advisors are involved, deals are often negotiated directly with another company, which may be a competitor of the company being sold. Deals other than main street deals aren’t generally listed for sale online. Deals are struck directly and advisors are often involved at every step of the way, including helping prospective buyers find companies to acquire.
Brokers field all phone calls from prospective buyers. When a buyer is interested in a business, she will call the broker to ask questions and obtain more information about the business. Your broker should be available to answer any questions about the business and provide additional written information about it. Your broker will prescreen prospective buyers to ensure the buyer is a real buyer who appears to have the ability to close a deal. A lot of phone calls are from people who would love to buy a business but have absolutely no business experience or resources and will not be able to obtain the financing or investors to get a deal done.
Once you have a qualified buyer who is genuinely interested in closing the deal, your broker will coordinate negotiations and provide advice on structuring the deal. Business brokers provide overall deal management to guide the client through the entire process, allowing sellers to remain focused on running their businesses during the sale process. This is perhaps one of the most important services provided by business brokers.
CHOOSING A BUSINESS BROKER OR OTHER MERGER & ACQUISITION PROFESSIONAL
So far, we’ve talked about different services business brokers and M&A advisors provide and ways to structure their compensation. Beyond the obvious advice of finding a broker or M&A consultant who will do what you want and structure compensation acceptable to you, you should look for an advisor who has experience with the type of business you’re selling and operates in the portion of the M&A market where you are operating.
Experience with your specific type of business may not be critical—that really depends on how unique the industry is. Most great business brokers and investment bankers can move in and out of various industries. However, it’s still helpful to find one that already understands your industry.
More importantly, be certain your broker or M&A advisor is excited by transactions the size of yours. Goldman Sachs is a massive, global, investment banking powerhouse. Even if they would handle your $3 million deal, you wouldn’t want to engage them to do it. They won’t be motivated by it. You don’t ever want to be a company’s least important client.
Lastly, find an M&A broker or advisor that you like and trust. In this regard, referrals are helpful. They aren’t critical, though, if you can spend a little time getting to know the brokers and advisors you’re speaking to and forming a strong feeling about how it will be to work with that person for the next 3-12 months.
If you want to talk to us about what we do and whether or not we’d be a good fit to act as your M&A advisor, reach out to us at 512.910.2700.