Monday, November 4, 2019

Selling Your Company; Investment Banker or Business Broker?

When the time comes for a business owner to consider selling their most valuable asset, it's important to select the right professional to assist in the process. Just like a business has trusted advisors, including an attorney, CPA and business banker, a business broker or investment banker should be added to the team, as much as a year before the sale. Here’s why: An experienced business intermediary will not only help you find a buyer but also help you position the business beforehand to extract maximum value.

While business broker and investment banker are familiar business terms, It’s less clear what each of these specialties actually does. While both find buyers for clients and support the sales transaction, their approach is much different.
So which one do you need?

Business Broker

A business broker typically works with businesses that have up to about 5 million in revenues, however, there is no hard and fast rule here. A business broker can sell a business of any size, but this range is where they are most effective. Larger businesses will need an investment banker who can provide in-depth analysis and marketing preparation and has relationships with institutional buyers.

Typically, the broker provides little support preceding the sale and routinely posts the confidential listing on popular internet sites. Similar to a real estate agent, they wait for the right buyer to present themselves. From there, they work through a process to validate the buyer, confirm financing is in place, and help the seller with final negotiation.

While a business broker provides limited support, it can be a great deal for the seller because the broker is only paid on performance; so they are motivated to get the business sold.

Investment Banker

An investment banker may be a better choice for some businesses that are exceeding 5 million in revenues, have a complicated legal structure, or are just more sophisticated than a typical small business. Just as in the case of a business broker, an investment banker can represent a business of any size but this range compliments the banker’s skills and network.

The approach of an investment banker is different because they will work with the business owner and find where changes in the business model or operations can unlock more value. Expect them to help in such areas:

  • Accounting
    • While it is prudent to operate with a tax shielding strategy, an investment banker (and CPA) will help you move to a profit maximization strategy. This will reflect the business’s true value to the market.
  • Employee management
    • A buyer will want to know what key employees are essential for the business to run efficiently and that this management structure is in place. An investment banker will help you analyze who these people are and more importantly, highlight their roles to the new buyer.
  • Supply Chain
    • An experienced banker will be able to examine how the business buys and sells goods and services. They will be able to identify inefficiencies or being over-leveraged with one supplier or large customer. Diversifying and limiting risk will bring additional value to the business.

In addition to M&A advisory, an investment banker can provide other services such as business financing, formal business valuations and Employee Stock Ownership Plans (ESOP). Because of the considerable up-front preparation, investment bankers typically charge a retainer either paid monthly or in a lump sum when the engagement begins.

Once the business is tuned to command top dollar, the banker will get to work soliciting the business with a more strategic approach than the business broker. The banker will devote considerable effort to identifying strategic buyers who should be interested in the client’s business and will, confidentially present the client’s business to them. Depending on the size of the business, it may be attractive to private equity groups or other institutional buyers. Confidentiality is always protected with a non-disclosure agreement (NDA) between parties. Because transactions of this size may be governed by the Securities and Exchange Commission (SEC), investment bankers must be licensed.

When a buyer is identified, an investment banker will stay with the seller providing all the support necessary with the letter of intent, buyer meetings, final negotiations, and the closing. At that time, the banker will earn a commission as in the case of the business broker.

Whichever professional you choose, it’s universally accepted the business owner should not try and do this complex transaction on their own. In addition to not maximizing the sale price, potential mistakes structuring the transaction can haunt a business seller years down the line and even potentially undo a deal.

Alan D. Austin, CFA

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