Steve McConley, Senior Business Transition Strategist, Wells Fargo Bank
- Having the right team can make all the difference when selling your company. If you decide to hire an advisor to sell your business, you must also determine what type of advisor to hire, either an investment banker or a business broker.
- Investment bankers get a company ready to go to market and prepare marketing materials for an auction process. They then guide the company through due diligence to get the best deal possible.
- Business brokers provide many of the same services but set the value and communicate terms to buyers which can be an effective means to market smaller businesses.
What this may mean for you
- It is important to consider the value that an investment banker or business broker can add to your business sale transaction.
Having the right team can make all the difference when selling your company. While most business owners understand the role of their attorney and Certified Public Accountant (CPA), they are typically less certain about the role of the person who orchestrates the deal. Specifically, “should I hire an investment banker or a business broker…or neither?”
Some owners don’t know any potential buyers for their business while others are approached often about selling. The decision of whether or not to hire a professional intermediary to sell your business depends on your particular situation and deserves proper consideration. For example, sometimes when working with business owners, I hear them mention that investment bankers frequently call offering to help sell their companies. Often times the feeling is that – if the owner decided to sell the company - they could do it by themselves, without assistance, and quickly. While this may be true, the sale may not occur at the same price or with the same terms and conditions that a good investment banking process could yield.
The decision of whether to hire an intermediary to broker a deal depends on whether their preparation, connections, process, and prowess are worth the fees they charge. In our experience, most deals benefit from having a professional intermediary, both in terms of price and term improvement but also in likelihood of closing a transaction.
That is not to say that every seller needs to be represented. If you have a buyer’s Letter of Intent (LOI), then you may not need to hire a broker or investment banker to manage the process. As long as you have planned personally to know what you need to get out of a sale and you are comfortable with the terms being offered, you may only need an attorney and CPA to help close the sale. However, you should also ask yourself one question: will I be able to live with the curiosity of not knowing what my company could have yielded in a sale process? Additionally, the lack of an investment banker or broker could increase the likelihood of the terms being renegotiated during and after the diligence process either due to actual diligence findings or because the buyer knows they are the only suitor.
In addition to deciding if you should hire an advisor to sell your business, you must also determine what type of advisor to hire, either an investment banker or a business broker. In order to make the most appropriate decision for you and your business, it is important to understand what each type of advisor will and won’t do.
For purposes of this article, the term investment banker specifically refers to a sell-side private company Merger and Acquisition (M&A) advisor. Other investment banking activities such as public offerings and debt syndication are beyond the scope of this comparison. Sell-side M&A investment bankers are typically responsible for all stages of the sale from company preparation to developing marketing materials and bidder lists all the way through the execution of the sale process and closing.
Investment bankers typically represent companies that exceed a certain size, often greater than $10 million in enterprise value or higher. These types of transactions typically involve sophisticated buyers. Because of this, an investment banker does not usually set or indicate the price of a transaction but rather provides information to allow for a competitive yet confidential auction. It is the presence of alternatives that gives a buyer the negotiating leverage to help them maximize the terms of their transaction. This situation happens when you get the right information to the right potential buyers with the right sense of urgency. Long before the sale process starts the investment banker helps prepare the business for sale. These adjustments can range from improving working capital efficiency to documenting procedures and cleaning up accounting; this process can take a year or longer so it is important to build your advisory team early.
The sale process for an investment banker normally includes preparation of the following key materials:
- Information request
- Comprehensive confidential information memorandum (“CIM” or “Information Presentation”)
- One-page teaser sheet
- List of potential suitors
After these materials are approved by the seller, the investment banker will typically proceed as follows:
- Contact the parties on the bidder list and share the teaser sheet
- Send non-disclosure agreements (NDA’s) to interested parties
- Send CIMs once the NDA is in place
- Review the indications of interest from suitors
- Provide additional information and host an on-site visit
At this point, suitors are asked to submit non-binding letters of intent. After some negotiating the seller typically executes a single letter of intent (LOI) granting exclusivity to one buyer who then commences their remaining due diligence. The investment banker should have prepared the seller and insured that the buyer has all deal-impacting information before an LOI is signed to help minimize the chance of having to renegotiate the deal after exclusivity is granted. The investment banker is involved in larger negotiations while the attorneys work through many of the details themselves. Note that the investment banker never provided an asking price to potential buyers. It was the confidential auction process that determined the terms of the transaction.
A business broker’s process is similar in many ways to that of an investment banker but there are a few key differences. A business broker will also help prepare a seller and develop a CIM, though the CIM may be abbreviated. While a broker may reach out to prospective buyers, they usually will also ‘list’ the company on their website. The offering price along with some key terms will be clearly specified in the initial discussion with a suitor. This is necessary because most business broker transactions are smaller and the buyers may not be well versed in valuation. Broker websites provide descriptions of their client’s companies, which may include a description of the business (type and size) and asking terms (price, cash at close versus seller financing). While business brokers may target an industry, most often they operate in a local market selling local companies to local buyers.
Like an investment banker, the business broker will solicit indications of interest from which to select a buyer. However because it is a listing, there may not be the same rigid timeframe in a broker’s process unless they are able to cultivate several interested parties simultaneously. The resulting LOI is similarly non-binding but it will also grant exclusivity to a buyer once it is executed. Like the investment banker, the broker will continue to advise the seller and negotiate on their behalf throughout due diligence and the preparation of legal documents.
Due to the differences in the level of service offered, business brokers typically work with smaller businesses that don’t fit with investment bankers.
Another key difference between an investment banker and a business broker is how they calculate fees. Both investment bankers and business brokers usually charge a success fee. This fee is paid at closing and is usually driven by the size the transaction…the more it sells for the higher the success fee. The difference is that business brokers will charge a declining percentage, such as 10% on the first million dollars, 8% on the second million, and 5% on anything above that, as an example. This is because brokers work on smaller transactions that still require significant work. Conversely, an investment banker will usually agree on a reasonable sale price and fee with the seller and charge a higher percentage to the extent the actual sale price exceeds that expectation.
An investment banker or business broker can be crucial in a business sale transaction. Generally the value added by an intermediary should more than make up for the fees charged. It is critical that the seller is comfortable with the person who is marketing their company so it is usually prudent to talk with more than one advisor before deciding who to hire. Overall, an investment banker will offer a much higher touch and customized approach for a seller while a broker will work on smaller deals and the approach is more like a commercial real estate process at times. If your company is large enough to warrant an investment banker, most sellers would prefer them as an intermediary because of that high touch. Business brokers may be a good option for smaller companies where the buyer is more likely to be local. Furthermore, your team should include an experienced transaction attorney and tax advisor.
As you consider a potential sale or other ownership transition of your company, please reach out to your advisor to introduce you to a business transition strategist who can help educate you on your alternatives.
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