One of the Most Important Decisions Many Business Owners Make
What’s the difference?
M&A Advisor. M&A Advisors typically represent larger businesses than Business Brokers. They tend to represent businesses with $5M in revenue or more, and at least $1M in EBITDA (“Earnings Before Interest, Taxes, Depreciation, and Amortization”). Example businesses may include a $25M revenue manufacturing firm; a $15M revenue IT Consulting Firm; a $100M revenue food distribution business; a $1B+ revenue Defense Contractor.
M&A Advisors typically perform extensive research on the business and its market and create a hefty “book” or “Confidential Information Memorandum” to be shared with a list of potential buyers they have identified. In most cases, no “asking price” or value is communicated to buyers. Instead, potential buyers submit offers which are then negotiated to reach a final deal.
An M&A is more likely to charge an up front or monthly fee called a “Retainer” or “Work Fee”, plus a percentage of the transaction value (“Transaction Fee”) if and when the sale takes place and direct expenses incurred by the advisor. Sometimes, the Transaction Fee is reduced by the amount of the Retainer or Work Fee paid.
Business Broker. Business Brokers typically represent smaller businesses with annual sales of between $100,000 and $5M. Example businesses utilizing a Business Broker are a $1.5M revenue neighborhood restaurant; a $600,000 revenue dry cleaning business; a $3M revenue disaster recovery business; a $4M revenue injection molding business.
Business Brokers typically perform less extensive research on the business and its market and create a more streamlined “book” or information package on the business. This information is typically shared with interested parties who find the business listed on one or more online business brokerage sites. A broker may also do a limited amount of outreach to potential buyers, but rely more on in-bound inquiries than M&A Advisors do. In most cases, the Business Broker determines the approximate valuation for the business and publishes an “asking price” along with the business listing.
Business Brokers do not customarily charge retainers or work fees. Their primary income source is from transaction fees paid when the sale takes place, plus direct expenses incurred by the broker.
Which is Better?
It all depends on which is the best fit for a particular business. And it is the business owner’s responsibility to select the professional advisor that best suits their situation. The M&A Advisor business model is more labor intensive as it involves a proactive marketing process, whereas the Business Broker takes a more passive approach to marketing that is akin to a real estate listing.
“Using a qualified advisor through the marketing, negotiation, due diligence and closing phases of a sale is highly recommended. This work is too specialized and time consuming to be a DIY project for the owner.”
6 Steps to the Right Advisor
1) Determine what type of advisor you need: Business Broker or M&A Advisory firm. Rule of thumb: if the business is below $5M in revenue, it is likely a better fit for a Business Broker. The best way to know is to talk to a couple of each in your market and ask their opinions. Most Business Brokers will want your business; they rarely have transaction size minimums or maximums. M&A Advisors will be more selective and are likely to be interested only if your business meets their minimum transaction fee or size.
2) Select at least 3 Brokers or Advisors to be interviewed. Identifying potential advisors is easy to do online, but I prefer to obtain recommendations from professionals in the local market area. Ask you CPA and your attorney for their recommendations. If possible, meet the advisors at their offices.
3) Interview the firms selected and ask each the same questions. Focus on their experience and their track record. Have they represented businesses similar to yours in the past? When was that? How did it go? What challenges did they encounter? What is their assessment of the market for a business like yours today? What is their sale process? Why should you hire them? From the firms interviewed in this step and not eliminated, request references from at least 2 successful sales they have completed and 1 unsuccessful engagement. Also request a sample Book/CIM that is representative of their work.
4) Interview each of the references. Learn as much as possible about the integrity of the advisory firm (Do they do what they say they will do?) and their level of professionalism. Ask for an example of a disagreement they had with the advisor during the process and how it was resolved. Finally, ask if they would hire the advisor again.
5) Request written engagement letters from each of the firms that you are interested in after the interviews. Compare the terms carefully. Pay particular attention to language concerning the transaction fee calculation and any “tail” period following termination of the engagement.
6) Seek legal counsel before signing any engagement letter. These are expected to be negotiated as they are drafted to protect the advisor, not you. Fees are always negotiable too.
Lastly, although not a step in the process but an overarching principle in selecting an advisor: hire someone you like! You can expect to spend the better part of a year working with this person/firm. Selling a business is a long and arduous process. It is critical that your advisor is highly competent and motivated, but a strong positive relationship with your advisor can be just as important to a successful transaction. Life is too short to work with jerks!
About the author: Jay is a business advisor and founder of MarketView. He developed the MarketView model, a proprietary system using market based data to evaluate privately owned businesses and prepare them for successful exit transactions. A frequent speaker and writer on the topics of seller preparedness and valuation enhancement, Jay lives in San Diego, California and works with business owners nationwide.
For more information, please contact:
Jay Carter
Founder and CEO
MarketView
704-904-7543