Business Broker or Merger & Acquisition Advisor? Know the Difference

Who are Their Clients?

Business Brokers:

Business brokers typically represent owners of businesses valued well under $2 million that serve a local clientele. Their clients are often referred to as “main street” businesses. Examples of “main street” businesses are dry cleaner, gas station, convenience store, restaurant, laundry, lawn care, landscaping, nursery, repair shop, beauty shop, individual franchise, and many other business-to-consumer operations with a single location.

Business brokers typically represent businesses that are run by the owner him or herself and no middle management.

Business brokers mainly represent businesses that have little expansion potential.

Business brokers usually work with businesses that resell products made by another (not their own, proprietary products) or are a franchisee or licensee.

Businesses offered by business brokers rarely sell for more than four times proven annual cash flow.

The most likely buyers for main street businesses are individuals that live near the business, and the buyer will typically work in the business after they have purchased it.

Buyers of main street businesses often have never owned a business before or been involved in the purchase or sale of a business before, and tend to have little or no knowledge of business transactions, financing, etc.

Merger & Acquisition (M&A) Advisors:

M&A Advisors typically represent owners of businesses valued in excess of $2 million. These businesses may be multi-unit retail establishments, dealers and franchisors, but are more often manufacturers, distributors or service businesses with regional, national or international clientele.

Businesses represented by M&A advisors may have a separation of ownership and management, and will almost always have some middle management personnel.

Businesses represented by M&A advisors will typically have much greater expansion potential than smaller businesses typically represented by business brokers.

Businesses represented by M&A advisors will have a much higher incidence of having their own proprietary brand, branded products and innovations.

Businesses offered by M&A advisors have a greater potential for garnering higher sale prices and earnings multiples, sometimes considerably higher.

Buyers of businesses represented by M&A advisors may be individuals (at least on the lower size deals), but are more often other companies and/or private equity groups.

Buyers of M&A advisor-represented businesses have typically owned and/or purchased and sold companies before. They also tend to be well-educated, well-connected and fairly experienced in business matters. As such, these buyers can be more of a “competitive threat” in that they can and may attempt to use their knowledge to their advantage (and your detriment). To that end, business sellers of mid-size companies should engage representation that has the education, experience and skill to match these shrewd buyers.

Services Provided

Business Brokers:

Business brokers typically act more like a real estate broker, listing many businesses and advertising them locally and on a website.

Business brokers will typically do little buyer search, outside of web postings and newspaper advertisements, and almost no direct prospecting to select buyer candidates.

Business brokers typically spend far less time per deal than M&A professional, primarily because they cannot afford to, given the smaller size (and fees) of each deal.

Business brokers themselves will typically have a background in real estate or general business, and may or may not have a college education, and have limited knowledge of the finance, accounting, tax and legal issues that impact a transaction.

Merger & Acquisition Advisors:

M&A firms operate less like a real estate brokerage firm and more like a consulting firm.

M&A firms will rarely advertise their “opportunities” within their local market, and will do little or no mass marketing. Instead, M&A firms will tend to conduct targeted buyer searches to buyers who have demonstrated interest in opportunities of the type being represented.

M&A firms typically have far fewer engagements than the business broker, and spend considerable amounts of time on each deal.

M&A advisors have a high level undergraduate degree in business, finance or law, and often an MBA or law degree. Prior industry experience is in finance, banking, or private equity before becoming an M&A advisor.

Fee Structure

Business Brokers:

Business Brokers will charge a commission of up to 15 percent of the transaction value and little or nothing up-front.

Merger & Acquisition Advisors:

M&A firms will require sizeable monthly retainer payments to offset the risk associated with the substantial amount of work that they will do up-front in researching the industry, packaging the business and preparing it for sale, proactively contacting and working with buyers, and managing the deal through to closing. Retainer fees can be a lump sum up front (which we highly discourage) ranging from $10,000 to $75,000 or a commensurate monthly amount (preferable), ranging from $5,000 to $10,000. This up-front fee should be discounted from the back-end fee if the sale is successful.

Back-end “success” fees for M&A deals vary widely depending on the size and complexity of the transaction but tend to be a lower percentage of the transaction value, ranging from 3 percent for deals above $75 million to 7 percent for deals under $10 million.

Who to Hire

The “who to hire” decision is largely determined by the type of business that you own. If you are selling a company that has less than $500,000 in annual earnings, you’ll want to hire a business broker. There will be little or no up-front cost and their listing service should adequately serve your needs. A true M&A firm would not be as skilled at representing you, given that they rarely work with buyers that target businesses valued under $2 million.

Consider the cost benefit. An M&A Firm will charge significant fees for representing your business. The good news is the better M&A firms will increase the value of your business sale by many multiples of its fee.

If your business is valued north of $2,000,000, you want a firm that focuses exclusively on larger deals. Such firms will be much more likely to have the education, experience and network that matches your opportunity. And, a good M&A firm will be capable of adding considerable value to your deal.