Wealth managers and personal financial planners today counsel their clients on the benefits of having an Exit Plan for the ownership of their closely-held business. When a sale to an outside buyer is the strategy chosen, one of the first steps is to engage an experienced advisor to manage the sale. The advisor’s task is to coordinate the specialized counsel of the outside attorneys, accountants and financial advisors, as well as to find the outside buyer and negotiate the deal structure.
Frequently a business owner is unsure about how to proceed. After all, this may be the first time they have ever seriously considered what’s involved in selling. While owners from time to time are contacted by people who say they are interested in buying, most owners do not respond out of fear that word will get out. Then as the business owner begins to search for such an advisor, the uncertainty only increases when they are faced with determining the difference between Business Brokers, M&A Intermediaries and Investment Bankers. Which to choose?
I’ll seek to provide some insight based upon my over thirty years in the business, but first let me assure you that even those of us in the business sometime struggle to distinguish the difference. Many of my friends, associates and competitors are likely to find something in what I say here as “not how I do business” and thereby seek to discredit the distinctions. Likewise, the distinct lines that I draw here for the purpose of differentiation between Business Brokers, M&A Intermediaries and Investment Bankers are at times actually blurry, dotted or wavy lines. So, if it seems confusing to you, just know that we in the business make the distinctions at the extremes and recognize there are many overlapping aspects when you get closer to the lines of distinction. Now that I’ve personally discredited all that I’m about to say, let’s get started.
Business Brokers typically focus upon the sale of small main-street, owner-operated businesses with annual revenues of less than $1,000,000. However, some will work with businesses that have greater revenues, but their selling process is geared towards finding individual buyers through purchased advertising in industry publications or on the Internet based websites such as BizBuySell.com. The average sales price for Business Brokers Nationwide is less than $500,000 and they typically sell 1 out of every 4 businesses which they list for sale.
Many are excellent salesmen and may be working with 30 to 40 small businesses at a time. Most will lack experience or training in income taxes, reading financial statements or the nuances of contract negotiation. It’s a high turnover career (40%+) with significant attention to co-brokering with other Business Brokers who may have a buyer interested in the advertised business. With additional education and experience some Business Brokers may gravitate to larger size businesses, while also remaining active in selling main-street size businesses. This is where the lines of distinction between Business Brokers and M&A Intermediaries gets blurry. Seeking to sell mid-market size businesses using a main-street advertising and co-brokering process can be ineffective. However, we often remind ourselves that deals still get done without an intermediary or in spite of a business broker, so we better be bringing something special to the table to earn our right to be there.
M&A Intermediaries typically focus on middle market companies with annual revenues from $5,000,000 to $50,000,000. Most are geographically focused and industry agnostic. A few however, may specialize on only a few industries and cover a larger geographical area. Most have obtained extensive education, training and experience in taxes, financial statements and contract negotiation. Unlike Business Brokers who have a Transaction Broker relationship with sellers and buyers, many, but not all, M&A Intermediaries take on a fiduciary, single agency relationship with their clients. Accordingly, when an advisor is needed for your Exit Plan to coordinate the specialized counsel of your outside attorney, accountant and personal financial advisor it’s an M&A Intermediary who can best serve your needs. Of course, this is my area of employ so I might be prejudiced.
Many of the better M&A Intermediaries obtained their training and experience either as practicing transaction attorneys, certified public accountants, as employees of larger investment banking firms or on the M&A staff of larger corporations. As a result, most are capable but not strong sales people; they rarely represent more than 3 to 5 companies at a time, but typically sell 4 out of every 5 companies they take to market. M&A Intermediaries typically prepare a 25-30 page written Confidential Information Memorandum (CIM) about their client’s companies which they share with targeted prospects only after obtaining a signed Non-Disclosure Agreement (NDA).
In most cases, the prospective buyers are approved by the client/ seller in advance of them being contacted by the M&A Intermediary with a short confidential teaser accompanied by a blank NDA. Rarely, do M&A Intermediaries place advertisements on the Internet websites such as BizBuySell.com, since most corporate/strategic buyers do not usually visit such websites looking for companies to acquire. Plus, most owners of middle market companies do not want their company advertised on the Internet.
The more experienced M&A Intermediaries may seek to help their clients identify the best cultural fit with the prospective buyers following the belief that when there is a cultural fit and trust & transparency are achieved between the parties, price & terms of the deal can be more easily worked out. Others prefer a more adversarial process called a controlled auction. My personal belief is that controlled auctions only work with larger self-managed organizations or where culture is less important than is the buyer gaining access to the seller’s unique technology or market exclusivity. It’s also much harder to maintain confidentiality with an adversarial auction process.
Investment Bankers typically follow a process very similar to the M&A Intermediaries for M&A activity, but organizationally they may look very differently from firm to firm. Since most Investment Bankers also raise capital for companies and assist with public offerings, they are highly regulated and their compliance costs force them to only represent larger companies. Many of the well known boutique Investment Banking firms will only represent middle market companies with annual revenues in excess of $100,000,000 and their process often includes a controlled auction. Since the majority of the firms represented by Investment Bankers are well known or in the public markets, confidentiality is much harder to maintain.
There is a wide disparity between Investment Banking firms. There are the very large firms that we hear about in the news doing the mega deals, the commercial bank affiliated firms, the regional firms, the boutique firms and then there are the affiliated firms, which are similar to financial planning firms where they are affiliated with FINRA registered broker-dealers under which they process client trades.
How They Get Paid is another significant difference. Business Brokers typically function like real estate brokers and get paid only a success fee, so if you don’t complete a sale there is no charge. However, as they take on larger engagements where the services delivered include more advisory services (valuation, packaging, structuring, buyer research) they tend to receive initial retainers and/or monthly retainers like the M&A Intermediaries and Investment Bankers.
How Long Will It Take is an issue of concern for most sellers. If you hire the wrong person or firm it might just reach a closing on the 12th of Never. Some may feel that if they hire a Business Broker to sell their middle market business, it won’t cost them anything if it doesn’t close. This may be true, but what about the exposure of your company to the market place without a complete and accurate written description of your company (CIM) for the prospective buyers to see? Experience shows me that a complete CIM that tells it all; the good bad and ugly, significantly enhances the likelihood of a deal making it all the way through due diligence to closing. The more complete the CIM, the quicker a prospective buyer can determine their interest, present their Letter of Intent and get through due diligence to a closing.
When selling your business, there are three important things; Price, Confidentiality and Speed to closing. You only get to pick two. For example, if you select Price and Speed, then you must give up on Confidentiality. If you select Confidentiality and Speed then anticipate a lower Price. Choose Confidentiality and Price and it will just take longer.
Len Russek, a former CPA has been a Mergers & Acquisitions advisor for over 30 years both inside large corporations and as an intermediary during which he has been involved in structuring and negotiating the sale of hundreds of businesses. Contact him at 727-894-7888 or LRussek@TransworldMA.com