Legal Matters: Investment bank, M&A advisor or business broker: Which is right for your deal?

Thomas R. Taylor 

A critical issue that must be addressed when selling a company is whether to engage a financial advisor. The decision generally revolves around three different types of advisors: investment bankers (iBankers), M&A advisors and business brokers. It’s important to understand the differences between each of these sell-side financial advisors and the services each offers. This article provides a brief overview of each of these advisors. 

Investment Bankers

The services offered by iBankers generally include identifying prospective buyers; preparing marketing materials, including a confidential information memorandum (CIM); negotiating letters of intent; and organizing management meetings with prospective buyers. An iBanker will assemble a team to work on a sell-side M&A engagement. Most lower middle market iBankers handle sell-side M&A deals for companies with annual revenues of approximately $25 million to $250 million; earnings before interest, taxes, depreciation and amortization (EBITDA) of $5 million to $50 million or more; and enterprise values of $25 million or more.

IBankers often charge an upfront retainer or an ongoing monthly retainer to cover their out-of-pocket expenses. The majority of an iBanker’s compensation will come from its “success fee,” which will be due and payable upon the closing of a sale transaction. Success fees vary depending on the structure and size of the transaction, but are generally 3 percent to 10 percent of the enterprise value. They assemble detailed financial, competitive, and other information and provide it to prospective buyers who will submit letters of intent that will establish the company’s market value. Most middle-market sell-side M&A transactions are valued based on a multiple of EBITDA. IBankers are knowledgeable of the appropriate EBITDA multiples for companies in specific industries and in evaluating a company’s EBITDA and determining any adjustments or “add-backs” that may be necessary.

IBankers take a proactive marketing and buyer outreach and identification process. In most sell-side engagements, iBankers will run a controlled auction among several sophisticated buyers simultaneously in order to get the highest and best price and most favorable terms possible as competing buyers attempt to “outbid” one another. IBankers routinely advise on such things as pre-closing spinoffs, restructurings and recapitalizations in order to achieve desired tax and/or business goals and objectives. They generally are involved in the planning process and preparing a company for sale and often assist in any necessary corporate “clean-up” that may be necessary.

M&A Advisors

M&A advisors “bridge the gap” between companies with less than $5 million in enterprise value, which are usually represented by business brokers, and companies with enterprise values of approximately $25 million to $250 million, which are usually represented by iBankers. M&A advisors take a proactive, strategic and targeted approach in identifying and contacting prospective buyers. Most M&A advisors assist with any necessary corporate “clean-up” that may be necessary in order to ensure the company is ready to go to market. M&A advisors don’t advertise their engagements through website postings, on the Internet or in newspapers. Rather, they generally work with a pool of prospective buyers with whom they have a relationship. They usually will prepare marketing materials, including a CIM, a controlled auction among several sophisticated buyers, and organize management meetings with prospective buyers. M&A advisors often work alone or with one or two assistants. Most M&A advisors handle transactions in the $5 million to $40 million range.

M&A advisors typically charge an upfront retainer to cover their out-of-pocket expenses and occasionally an ongoing monthly retainer. M&A advisors are usually paid on a success fee basis upon the closing of a sale transaction. Those fees often range from 1.5 percent to 7 percent of the enterprise value. M&A advisors generally are familiar with valuation multiples in the industries in which they work and the application of a multiple to the company’s EBITDA in order to derive an estimated sales price or price range. M&A advisors often have a pre-existing relationship with the selling company or its owner(s) through prior business dealings, often including prior consulting engagements. Many M&A advisors have relationships with potential buyers, such as private equity firms and family offices, as well as potential strategic buyers, who they will approach to determine their level of interest.

Business Brokers

Business brokers generally are involved in the sale of the assets (as opposed to stock or equity securities) of companies with enterprise values of less than $5 million and EBITDAs in the $500,000 to $2 million range. Business brokers will set an “asking” price for the company and post the company and its “asking” price on their website and certain Internet sites, and in advertisements in newspapers or other publications. They may also reach out to prospective buyers in their buyer data base.

Business brokers often are one-person operations. Accordingly, they typically do little deal analysis and provide limited consulting and advisory services and are generally not actively involved in preparing a company to go to market. Rather, they leave those functions up to the business owner(s) or other advisors (such as an attorney or accountant). Most business brokers handle transactions in the $2 million to $5 million range. They are often engaged to sell small service businesses, such as barber shops and beauty salons, dry cleaners, and daycares, as well as other business, including convenience stores, small manufacturing companies and single-location restaurants.

Business brokers usually do not charge an upfront retainer or fee, although some may charge a small retainer to cover their out-of-pocket expenses. Business brokers charge a “commission,” which will be due and payable upon the closing of a transaction. Those commissions typically range from 7 percent to 12 percent of the transaction value and usually are structured in accordance with a formula tied to a declining percentage of sale price, generally referred to as the “Double Lehman Formula.” The Double Lehman Formula provides for a 10 percent commission on the first million dollars of deal consideration, 8 percent on the second million, 6 percent on the third million, 4 percent on the fourth million and 2 percent on all additional consideration. Business brokers generally have experience in valuing companies that have relatively simple and straightforward operations and capital structures. Typically, business brokers will rely on metrics such as basic financial and operating results and profitability metrics in setting an “asking” price.

Thomas R. Taylor is a corporate and M&A lawyer and shareholder in the Salt Lake City office of the international law firm of Dentons Durham Jones Pinegar PC. Dentons is the largest law firm in the world, with more than 12,000 lawyers practicing in over 200 offices (more than 40 of which are in the United States) in over 90 countries. He is listed as one of the leading M&A lawyers in the United States by both Chambers & Partners and Super Lawyers. Taylor is listed among America’s Top 100 Attorneys by America’s Top 100 Attorneys.com. He maintains an “AV”/Preeminent rating with Martindale-Hubbell, which is the highest rating awarded to attorneys for professional competence and ethics.