What is the difference between an investment banker and business broker in sell-side M&A transactions?
There are many advisors involved in sell-side mergers and acquisitions (M&A) transactions, but the two that really help business owners through the entire sale process are investment bankers and business brokers. While these two types of professionals are often thought of as being the same because they both help business owners sell their company, in reality they are very different. Understanding the distinction between investment bankers and business brokers is crucial for business owners looking to sell their companies. This article delves into these differences, highlighting the unique roles and approaches of each.
Investment Bankers: Working on Larger M&A Transactions
Investment bankers are the go-to experts for sell-side M&A transactions involving companies valued at $10 million or more. Their role is pivotal in guiding middle-market business owners through the complexities of the sale of their business.
Key Functions of Investment Bankers in M&A
Complex Transaction Management: Investment bankers excel in managing larger M&A deals. Their expertise lies in quickly understanding the businesses and industries of their clients and being able to formulate a compelling offering for the company. Larger transactions can often be much more complex than smaller transactions, and investment bankers have to be able to manage through the complexity and help their clients understand and work through all of the issues involved in the sale.
Market Preparation: A core part of their role is preparing a company for sale. This involves preparing a confidential information presentation, executive summary, performing comprehensive financial analysis, financial modeling, business valuation, and strategizing how to present the company in the best possible manner to a broad range of potential strategic and financial buyers.
Targeted Outreach: Investment bankers employ a strategic approach in finding suitable acquirers. They leverage their extensive networks and deep industry insights to identify and engage potential buyers who are a good fit for the transaction. They contact potential buyers directly to introduce the opportunity, and only share confidential information with potential buyers who sign a confidentiality agreement.
No Stated Valuation and the Auction Process: Investment bankers utilize an M&A auction process to uncover the best possible purchase price and other terms for the seller. While they will discuss the valuation of the company with the seller prior to taking the company to market, they do not share that valuation with buyers and do not have a “list price” for the company. Instead, they will utilize an M&A auction process that organizes two or more rounds of bidding from interested potential buyers. The buyers will have had access to quite a bit of information about the company prior to the bidding so they can make an informed decision about the value they are comfortable paying. The auction process is blinded so that none of the buyers know who else is making an offer for the company or how much they are offering. This competition has proven to elicit valuations that are significantly higher than those offered in a one-on-one negotiation that resulted from an unsolicited offer. This process gives the investment banker and their clients significant negotiating power as they negotiate the final terms of each offer. At the end of the M&A auction process, the seller chooses which buyer they want to sell to (the highest bidder doesn’t automatically win - it is the seller’s right to choose who they want to sell to). Sell My Business: Go-To-Market & Auction Process Video.
Team: The professionals working at Investment banking firms typically have significant M&A, finance, and management experience. They are the top professionals a business owner can work with to sell their business, and often have advanced degrees and professional credentials.
Fee Structure: Investment bankers typically charge an upfront retainer plus a success fee that is a predetermined percentage of the transaction value.
Business Brokers: Working on Smaller M&A Deals
Conversely, business brokers focus on sell-side M&A transactions for companies valued at less than $10 million, and realistically, most of their transactions are less than $5 million in value. They play a vital role in assisting owners of small businesses in finding buyers and navigating the sale process.
Key Functions of Business Brokers in M&A
Simple Transaction Management: Business brokers are adept at facilitating less complex sales. They often work only with companies in their local markets, understanding the specific needs of small business transactions.
Market Preparation: In most of the transactions the business broker works on, they are preparing just enough information to allow the potential buyers to examine the company. They are often simply presenting historical tax returns for the financial information and a brief summary of the company for the overview.
Broad, Untargeted Outreach: Business brokers usually post their “listings” on their web site as well as “bulletin board” type sites that list companies for sale. They may also send the summary to all of the potential buyers they have in their database, rather than targeted buyers.
Valuation Listed and Sale Process: In contrast to investment bankers, business brokers typically set a clear price and terms for the businesses they represent. They negotiate with potential buyers on a one-on-one basis and don’t utilize an M&A auction process. This approach suits the more straightforward nature of smaller transactions and the potential lack of sophistication of the likely buyers. It is rare for a company being sold by a business broker to sell for more than the list price.
Team: Business brokers usually come from backgrounds in business management or sales, giving them the practical knowledge to effectively assist small business owners.
Fee Structure: Business brokers usually work on a commission only basis. They work on many more deals at once than an investment banker and do much less work prior to taking a company to market, so they can easily work on a commission only basis.
In sell-side M&A, the choice between an investment banker and a business broker hinges on the size and complexity of the transaction. For the sale of larger, more complex transactions, investment bankers are the suitable choice. Owners of small businesses should find a suitable business broker to help them with the sale of their business. Recognizing these differences ensures that business owners select the right professional, paving the way for a successful and smooth transaction.
Medium to Large (>=$10MM value)
Small (<$10MM value)
Moderate to highly complex
Preparation Prior to Going To Market
Listing Price for Company
No listing price, negotiated transaction
All companies have a list price
Highly educated and credentialed professionals with background in finance, accounting, and management
Backgrounds in business management and sales
Retainer plus success fee
Success fee only
About Waypoint Private Capital
Waypoint Private Capital is an investment banking firm that advises the owners and management teams of middle-market companies through critical stages of their business' life cycle. Waypoint helps business owners sell companies, buy companies, raise equity and debt capital for growth and recapitalization, and plan for a successful exit from their business.
To learn more visit waypointprivatecapital.com or call us at 608.515.3354 or 918.633.2647 and speak with a Waypoint Private Capital expert.
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