Business Broker, M&A Advisor, Investment Banker—Which One Fits Your Company?

Three general types of intermediaries work with business owners to buy and sell companies:  business brokers, merger and acquisition (M&A) advisors, and investment bankers.

The right intermediary will fit with your company in terms of the company’s size and management sophistication, and target buyer groups.  The right advisor must also have the experience, market methodology and resources to successfully represent your company, and to identify, attract and negotiate with the level and types of buyers you’ll be pursuing.

There is some overlap between company and advisor types.  A company that’s “main street” in revenues but has strong margins, consistent revenue growth and a solid management team might benefit from engaging an M&A advisor, rather than a business broker.  An M&A advisor with deep industry and regional experience might be more effective (and less costly) than an investment bank, for a company on the borderline between lower-middle and middle market size.

Here are some general guidelines:

Business Brokers

Company Type:	Main Street and Small Business
Company Size:	Revenues under $10 million
	SDE* under $1.0 million
	Employees under 50
Management:	Usually owner-managed, may have some middle management
Target Buyers:	Individuals, or similar-sized companies
Financing:	Seller finance; SBA-guaranteed bank financing
Marketing Method:	Broker website; “business for sale” websites
Market Scope:	Typically local or same-state; sometimes nearby states
Negotiation:	Often one buyer, may have limited competition

M&A Advisors

Company Type:	Lower Middle Market
Company Size:	Revenues $10 to $100 million
	Employees over 50 (sometimes less)
	EBITDA *  over $1.5 million; usually over $2 million
Management:	Management team in place; may be some dependence on owner
Target Buyers:	Financial (Private Equity Groups, or PEGs); Strategic (corporate)
Financing:	Senior and subordinate debt; seller equity rollover
Marketing Method:	Proactive, direct outreach to researched buyer pools
Market Scope:	National; sometimes multi-state regional, or international
Negotiation:	Managed competition process; typically several competing offers

Investment Banks

Company Type:	Middle and Upper Market
Company Size:	Revenues $100 million and up
	Employees 500 or more
	EBITDA* over $10 million
Management:	Full upper and middle management team; no owner dependence
Target Buyers:	Large PEGs; hedge funds; publicly traded companies
Financing:	Senior and subordinate debt; IPOs and private equity offerings
Marketing Method:	Proactive outreach to buyer pools; “pitch book” presentation tours
Market Scope:	International
Negotiation:	Formal auction process; typically numerous competing offers

* Earnings measures utilized:

SDE: Earnings before interest, taxes, depreciation & amortization, plus owner-manager’s salary. (used for positioning for an owner-operator type buyer)

EBITDA: SDE minus one market-level general manager or CEO salary. (used for positioning a company for a private equity or strategic buyer.)

Both SDE and EBITDA are “normalized”: adjusting rent and owner-managers’ salaries to market rate; also subtracting non-operating income, and adding back non-business (nonessential) and non-recurring (one-time) expenses.

Benefits to Sellers from Retaining an Advisor—Beyond Finding a Buyer

Perhaps you’ve already been contacted by a buyer who seems ready to make an offer. If a buyer’s already in the picture, why hire and pay an intermediary—such as an M&A advisor, business broker or investment banker?

The two primary reasons:

1. Negotiating with a single buyer puts the buyer in the driver’s seat, and the seller in the back seat. The seller has no ready alternative.  Their offer is the only offer—and they know it.  The further a seller goes in negotiations with a single buyer, the harder it is to back out and start over again from square one—and the buyer’s knowledge of that often costs the seller dearly. That’s why we often say, “one buyer is no buyer.”
2. Even if the buyer is acting in full good faith, transactions without experienced intermediaries often self-destruct in the course of negotiations. That’s because key issues are not negotiated at the proper time, or the seller cannot commit the proper amount of time to support the buyer’s due diligence because they are consumed with running their business. When these single-buyer deals die, it leaves owners starting over from scratch, after months of wasted time and costs.

AdvantEdge has the methods and the experience to assemble a pool of well-qualified buyers; to do this confidentially (without the fact that you’re for sale becoming common knowledge); and to manage a controlled competition among the buyers, to get you the best price and terms available. Once the best buyer is selected, the advisors run the transaction process through to closing, dramatically reducing the demands on the business owner.

Also keep in mind:

• From studies of the M&A, business broker and investment banking field, hiring a professional advisor increases price by an average of 20%, improves seller’s terms, and increases the probability of successful closing. Bottom line: M&A advisory services almost always deliver gains that far exceed the costs.
• In these complex transactions, time is not our friend. The more delay, the more opportunity for something—from a family problem to a business setback (on either buy-side or sell-side) —to derail the transaction or compromise the valuation.
• Experienced advisors work with the sellers and their other professional advisors to conduct “pre-diligence.” We pre-screen the items that the buyer’s advisors are going to scrutinize later. We organize an electronic “data room” which buyers who have signed our confidentiality agreement can access.  Having everything reviewed, corrected and organized in advance saves precious time, sustains forward momentum, and builds credibility for the sellers and their business.
• Experienced advisors also set and enforce “hurdle dates” to keep the buyers moving on a scheduled path to closing.  We also recognize and avoid accepting at early stages (such as the Letter of Intent) deal conditions or provisions that can lead to serious conflict at later stages (final purchase documents.)
• When the purchase is negotiated directly between buyer and seller, the disagreements, struggles and emotional baggage of the negotiation attach directly to the parties. The seller must go directly from opposing and sometimes antagonizing a prospective buyer in negotiations, to working with or supporting that buyer as the new company owner, post-transaction.  Having a professional advisor take on the “slings and arrows” of negotiation makes the post-close transition far easier, and more likely to succeed.
• It can be a fatal mistake for the owner to become distracted by the M&A process from keeping a clear focus on running the business, and maintaining the keys to success which make it attractive to buyers.  If the business begins to deteriorate during the due diligence and closing process, those facts will come to light.  That can be devastating to sale price and terms; and in many cases, can completely derail the transaction.