The team you choose is critical to your success if you decide to buy a company, sell your company, and/or raise capital, especially in small to mid-market transactions. For you, the possibilities are huge and can be confusing as you work to ascertain who is optimal in serving your interests. The three main groups you should consider are M&A advisors, business brokers, and investment banks:
- Deal Size: M&A advisors bridge the gap between the truly small, one-person shop transaction and the medium to larger deals that investment bankers usually handle. Deal sizes of $5M to $25M or EBITDA’s of $1M to $5M are typical. Deals larger than this are much more complex and have oversight from regulatory bodies, and the professionals who serve that market must be licensed under securities law.
- Scope of Services: M&A advisors usually are just that, advisory. They tend to be more strategic and can assist with transaction structuring, financing arrangements, offering consultation, etc. They do a lot more than a broker would—consultations are their main form of income.
- Process: The process used depends on the need of the company and the skill set of the advisor group. With a larger group, their valuation methods will be more elaborate and can include strategic potential, required investment, intellectual asset valuation, and future potential.
- Licensing: Due to the size and relative lack of complexity, you’ll find most M&A advisors are not licensed.
- Fees: The fees will depend on the nature of the work and can be based on the project or by the service. It also can be like an investment bank since there are work fees, success fees, and expenses.
- Deal Size: Usually, brokers serve smaller companies. Some estimate they play in the less than $2M in transaction value or less than $1M in EBITDA. Brokers are on the smaller end of the company size scale. Companies such as hair salons, gas stations, dry cleaners, single location restaurants, mom-and-pop shops, and quick marts are typical. Additionally, these companies are solely-owned and the buyer is likely to be an individual as opposed to a corporation or institution.
- Scope of Services: Most, if not all marketing materials, historical data, and financials will be prepared by the business owner. If you’re a buyer, beware of this path as it is likely the books have not been prepared in agreement with GAAP accounting standards. This creates a big risk both for the buyer and seller as no one really knows the true state of the business.
- Process: The agreement terms and the processes are like those used to sell a house. Once the materials are ready, the broker lists the business on various websites. The company is advertised with some details and an asking price. These buy/sell sites generally are regional as buyers will not usually move to wholly different locations for such small businesses. This process is dubbed the “post and pray” strategy and is very passive. Financing the deal usually is either an SBA loan or a seller’s note. Valuation usually is based on the cash flow the owner/operator makes—called the “seller’s discretionary earnings.” Further, the sale price typically is based on some rule of thumb measure.
- Licensing: As this arena is not governed nor has any regulatory oversight other than basic law, brokers generally are not licensed. The obvious risk is that they are solely self-accountable. There is a certification a broker can get called the Certified Business Intermediary and it is the gold standard in the broker world. Look for this certification if you choose this path.
- Fees: Usually, there are no upfront fees as most initial effort is left to the clients. Brokers typically charge a success fee of 10 percent of the transaction value. Be sure to ask if there are any other fees or charges.
- Deal Size: Investment bankers usually are found in the medium to truly global-sized deals. When you read about two large companies merging or one buying another or a large division is spun off, these deals are done by investment banks such as JPMorgan Chase and Goldman Sachs. However, a growing number of investment banks focus on small to middle market transactions, and they should be strongly considered if you’re buying a business, selling your business, and/or raising capital. Plus, they’re experienced in doing deals that fit your size.
- Scope of Services: They will be very strategic, offering a multitude of services around buying, selling and raising capital, including fairness opinions, public offerings, private placements, underwriting deals, strategic analysis, detailed valuations, etc. They will prepare a marketable book, prepare and work with management during due diligence, carefully target and contact potential partners, and navigate sensitive negotiations.
- Process: Investment banks have well-defined, managed processes due to the nature and complexity of their services. There should be a dedicated research team capable of sourcing comparative and precedent transactions as well as being able to source buyers/sellers for the transactions they cover. Between the services and the processes, investment bankers increase transaction values on the sell side and optimize value gained on the buy side.
- Licensing: Because of the complexity of the deals and industry regulation by the government, investment bankers are licensed and required to have on-going training and testing.
- Fees: As discussed in Topic 1 in this series, investment bankers have three types of fees—monthly retainers or work fees; success fees based on the transaction value; and expenses such as travel.