When contemplating the sale of your business, you may consider hiring a business broker or an investment banker. But what’s the difference between the two, and do you really need either one? Here are some things to consider.
Size: The biggest differentiating factor between a business broker and an investment bank is the size of business they are comfortable with and experienced in representing. Business brokers typically focus on businesses with revenues less than $5 million, while investment bankers usually work with companies over $5 million in revenues. There are exceptions to this, of course, but generally it makes sense to draw the line at $5 million to justify the expected fee commensurate with the work and time invested.
Resources: The typical business broker is usually a one-person shop with limited resources, while an investment banker includes a team of people to help prepare your business for sale and guide you through the process. At FOCUS, our engagement teams include two senior bankers, a dedicated financial analyst, and a research team to help prepare the marketing materials, manage the data site, and coordinate the information flow between the seller and the prospective buyers.
Outreach to Targeted Buyers: In my mind, this is one of the biggest differentiating factors between the two types of advisors. Business brokers usually handle a variety of small business types (think coin laundries, lawn and pool service companies, restaurants, etc.). The process is like using a Realtor to sell your home. They take pictures and place the ad on a multiple listing service (like BizBuySell.com) to advertise the business for sale. They are typically looking for an individual buyer or small group of buyers. If you want to maintain the confidentiality of the sale, the broker can highlight basic facts about your business so that your competitors are not able to figure out that it’s your business that is for sale.
Investment bankers take a different, more direct approach to finding and soliciting interest in your business. We capitalize on our industry knowledge, experience, and proprietary data bases to put together a list of potential suitors for you. In collision repair, for example, our team has more than 50 years of combined experience in the industry, having completed over 20 transactions covering more than 60 shops in recent years. We concentrate in the space, know the market, and the buyers.
Regulation: Investment banks are highly regulated while business brokers are usually able to operate with minimal requirements—think a licensed contractor versus a handyman.
Sale Type: Business brokers usually handle asset sales only while investment bankers are licensed to handle a variety of investment sale types, including assets, stock, and real estate.
Fees: Business brokers generally do not require a monthly fee, but instead are paid at the closing of the transaction. The fee usually runs about 10–12% of the total value of the purchase price. Investment bankers, on the other hand, usually require a monthly retainer or milestone payments, such as at the beginning when the engagement is signed, the marketing materials are finalized, and a Letter of Intent is signed. Fees vary widely based on the value of the business and total transaction value. Some may suggest a graduated fee structure so that the more you earn, the more they earn. It helps to make sure everyone’s goals are aligned, and in that scenario, the banker is rewarded for getting a price above your expectations.
Selling your business is a major decision and should not be taken lightly. It’s a difficult, time-consuming process that many business owners are not equipped to handle themselves. Rarely will business owners do it more than once in their lifetime, so why not at least invite a professional to discuss it with you?
The majority of brokers and investment bankers I know will be happy to have a confidential, no-obligation call with you to discuss at a high level what they believe your business is worth, how their process works, and the expected fee.