M&A firm vs. Business Broker
- April 26, 2021
- Posted by: gastonreeder
- Categories: Finance & accounting, Uncategorized
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So you want to sell your business...
So you want to sell your business. Retirement or moving on to the next venture is on the horizon and it’s one of the most exciting and nerve-wracking challenges of your career.
You’ve probably received calls and or emails from business brokers over the years. Perhaps your CPA “knows someone” who might be able to help or has offered to do the deal themself (avoid this).
At the end of the day, you’re left researching a sea of marketing material for answers to questions that you absolutely need to get correct.
A need for representation
Let’s start with the obvious, you need representation unless you have a background selling companies. Even if you do, typically teams of people work on each acquisition handling different tasks such as financial analysis, marketing, due diligence, negotiations, etc.
Confidentiality is also of HUGE importance in these deals. How are you going to market your business to multiple buyers without a.) lying about who you are or b.) disclosing your name and therefore disclosing your business is for sale.
Unless you are the type of person that represents yourself in litigation, sells your house without an agent, and does your corporate taxes without a CPA, avoid trying to sell your own company.
The three types of representatives:
You have three viable options when it comes to an M&A advisor that can sell your company. Each of them has pros and cons and each is best suited towards a specific type of transaction.
It’s important that you, the business owner, are realistic with your business when picking your advisor because, with the exception of large M&A firms that have a revenue limit, all of them will accept you even if they are not necessarily the best fit.
The Business Broker
Small business owners, particularly with very small companies, typically love to compare selling their business to selling their house. They want to list their business and pay an agent a commission at the end of the deal to complete it.
This is the business broker model. It’s very similar to a real estate representation in the broker gathers listings, places ads up online, and waits for the buyers to come along and bite.
If you own a Mainstreet type business such as a convenience store, restaurant, nail salon, etc. this is likely the best option for you.
Typically, there are no upfront fees or they are minimal. You pay a commission at the end of the transaction and that is that.
The Business Intermediary
This is likely “the someone” that your CPA knows and recommended. A business intermediary typically has come out of an M&A firm, had decades of success at a brokerage, or worked in Private Equity.
They are typically knowledgeable in one particular industry and do a deal or two per year.
While they typically come with more professional horsepower than a standard broker, they are also working by themselves or with an assistant. This makes them a good fit for small non-complex deals or deals where you already have the buyer and need a professional to bring the deal home with favorable terms.
Business intermediaries typically charge an upfront fee and commission upon completion of the transaction. It is not uncommon for some to charge monthly fees.
M&A firms and Investment Banks:
This is where business, financial, and legal expertise all meet within the confines of the same office with one purpose. Getting the deals in their portfolio completed.
A good M&A firm will advise you on the outcome of your transaction before taking you to market to understand whether your goals are achievable.
If you move forward, your business will be professionally prepared for the market with necessary information included in a Confidential Information Memorandum. If there is speculation on the purchase price, your M&A firm might conduct a formal Valuation (if they are licensed) or have you hire a Certified Valuation Analyst outside of their firm.
An M&A firm is not always the cheapest option but it almost always the best. Teams of people work on each transaction with financial analysts preparing documents, marketing people making cold calls, and transaction advisors going to battle for your best interest.
M&A firms typically charge an upfront fee to prepare the business for market and a commission upon completion.
*** be wary of firms claiming you need to pay tens of thousands of dollars to enter the market. The commitment a company makes for representation should reflect the size of the transaction. For instance, a company with $2M in revenue should not pay $20-30k upfront. For a company with $20M in revenue, this would be more appropriate.
In Closing...
At the end of the day, choosing the right representation can mean the difference of a few thousand to a few million in purchase price, favorable terms or a nightmare transition period, getting your deal done or wasting your time and money.
We at Exodus hope to be included in the interview process when you are ready to start looking.
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Exodus delivered on what they said they were going to do in our first meetings. It was a pleasure working with their team to sell my company. They are truly experts in aerospace/defense manufacturing.
Robert Oliva
President, Romakk Engineering