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M&A Advisor vs Investment Banker vs Business Broker
M&A advisory firms and investment banking firms are similar in their services, although there are some distinct differences. Essentially M&A advisors bridge the market gap between large transactions that are clearly led by institutional investment bankers (those where the deal size is typically greater than $250 million), and on the lower end those transactions which are usually facilitated by business brokers (typically less than $2-$5 million). Investment bankers typically offer a broader range of services and work with much larger corporations. Such services include public stock transactions, fairness opinions, public stock offerings, etc. These transactions require broker-dealer licensing in order to facilitate trades and transactions, where M&A advisory firms as a rule of thumb work with privately held businesses with revenue less than $250 million and often EBITDA less than $25 million.
In practice, lower middle market transactions (private companies with less than $250M in revenue) do not require the advisor to be broker-dealer licensed as long as they comply with regulatory guidelines. Thus, you will find that the majority of middle market M&A advisory firms often partner with a major investment bank when regulatory requirements necessitate. In general, investment bankers are highly transaction driven, focus on volume throughput and have minimum fee expectations, which tend to limit the size clients that they serve to larger institutions. M&A advisors tend to be boutique in culture and consultative in nature and may work with small to mid-market clients in the strategy and planning phases as they consider their exit, liquidity or succession alternatives, then utilizing the deeper knowledge of the company they manage the transaction process often yielding highly successful outcomes. Both M&A advisors and investment bankers run a process to sell a company that is proactive and usually focused on creating a competitive and timed environment for the seller, with the goal of optimizing the value and reaching the seller’s objectives. Unlike passive processes used by business brokers (listings), the actively managed process of M&A advisors often adds significant value to the transaction in many areas. The seller should look at fees not as a cost, but as an investment with an expected return. See more here: Value of an Investment Banker in the M&A Process
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Value of an Investment Banker in the M&A Process Why do you need an M&A Advisor? There is often a great deal of debate when considering to engage with an Investment Banker / M&A Advisor when it comes to selling your company. To have achieved enough success and growth to consider selling, companies must already be helmed by intelligent, problem-solving individuals. As such, selling your company is often looked at as another goal easily achievable by your world-class team, begging the question; will an investment banker provide value, or are you better off navigating these waters alone? M&A is an incredibly complex process with lots of twists and hidden pitfalls that can make the process much more difficult, and potentially catastrophic if not managed properly. As middle-market companies are an extensive portion of global commerce, it is critical to understand this market well. Many sellers who approach this process on their own lack an understanding of the transaction process, do not have an in depth understanding of the market value components of their business, which can easily become detrimental to the sale process.
Investment bankers consistently provide value to your transaction, but in what way? M&A advisors serve as a guide throughout the deal process, managing the transaction to ensure you find the best buyer at the best price. In the same study, business owners scored the following eight services provided by investment bankers as most valuable:  Study conducted by Michael B. McDonald, a professor of finance at Fairfield University #1: Managing the M&A process & strategy.
Nearly all business owners say managing the complex M&A process is the most valuable service the banker provides. Solid and experienced investment bankers establish a thorough process and a strategy to execute, keeping in mind your goals and constraints; including a go-to-market plan, constructively documenting and presenting your company, negotiating best structure and key terms, and managing a timeline. When a buyer is engaged, the banker then structures the transaction to ultimately suit you and your company. Without this disciplined process, you may often wonder if the best offer was obtained. #2&4: Structuring and negotiating the transition. Managing this complex process is one of the most valuable services a banker provides, which includes structuring all points of the transition. With a myriad of experience, bankers negotiate on your behalf to achieve objectives and limit potential risks, thus significantly increasing the probability of a successful close. In developing this balanced solution, sellers often gain significant benefits beyond a successful closing, such as preferential tax treatment or ensuring intangibles for the business owner like retention of key staff, additional earn outs, bonus programs, and more. #3&5: Allowing owners and management to continue to focus on their business. M&A is a lengthy, complex process that easily becomes all consuming. Bankers manage the entirety of the process, allow you to focus on your company success during transition and do what is right for your team. A good advisor will learn and understand your business, and coach you through the complex process. #6: Establishing seller credibility. Most first-time sellers do not know the true value of their business, so the involvement of a banker often creates credible information and a clearer expectation of valuation; 84% of business owners in Dr. McDonald’s previously mentioned study found their final sale price was equal to or higher than the initial price estimated by the banker. By engaging with an advisor you level the playing field by placing yourself on the same plane as professional buyers. #7: Preparing the company for sale and coaching you through the sale process. As the seller you are able to step back from negotiations when engaging an investment banker to manage a sale process. Using a banker to lead often difficult negotiations gives you the ability to maintain a positive working relationship with your buyer. This is imperative, as this relationship is often long lasting; if a seller takes on these negotiations themselves this relationship can often begin strained. Bankers protect the seller from potentially contentious deals while coaching you through the process to ensure your company is purchased for full valuation. #8: Engaging and identifying the best buyer. It is interesting that the study found this item lowest on the list for the 85 companies surveyed. Often a seller will start here with this as their number one priority [find me a buyer at the highest price!], but quickly learns that it is a deep understanding of your business and a professionally run process, complemented with a solid structure of the deal that yields the best result short and long term. M&A advisors enter every transaction with a wide network of professional contacts, industry databases, extensive research, and wide networks of relationships. By understanding your business, your desires & values, and overall objectives for your company, they pair these requirements with an audience of credible buyers sharing similar goals. This allows the advisor to successfully identify buyers and manage a competitive bidding process, inevitably maximizing the shareholder value and ensuring a strong partnership. The more complex your business and the market is, the more critical the need for an aligned M&A Advisor becomes. "Mergers are like marriages. They are the bringing together of two individuals. If you wouldn't marry someone for the 'operational efficiencies' they offer in the running of a household, then why would you combine two companies with unique cultures and identities for that reason?" - Simon Sinek For both business owners and advisors alike, managing the M&A process and strategy is considered the most valuable service an advisor can provide. You can be assured that as a business owner you are making a valuable investment when engaging with an investment banker. Leveling the playing field between buyers and first time sellers ultimately leads to a more effective negotiation, amicable transition, and more value (tangible & intangible) for your company. Not all business owners need to use an investment banker, but the benefits one can provide are indisputable. |
