The Different Experts in the M&A Market
As a business owner, you may be planning to sell your business, acquire someone else’s, or merge with another business. Often times, M&A transactions are a means to a fulfilling retirement or another wealth creating business endeavor. These kinds of transactions are not to be taken lightly. It is important to know the different types of experts in the marketplace that can help you achieve your desired outcome for the sale, purchase, or merger of a business. There are three main practices that operate in this space: business brokers, M&A advisors, and investment bankers.
Business brokers typically work with owners of companies at the lower end of the market or Main Street market. These businesses, Mom and Pop shops, bars, restaurants, etc., are often worth around one or two million dollars and below. Because of the size, buyers of these businesses tend to be individuals, rather than corporate or institutional buyers. For this reason, a business broker’s process can be similar to listing a house and is more passive than that of an M&A advisor or investment banker. First, the broker assigns a listing price to the business (often a value based on seller’s discretionary earnings, or cash flows to the owner). Next, the broker will list the business for sale on multiple listing sites and develop a plan to market the business to potential local buyers. The broker then fields calls from potential buyers that may come in from the listing sites in hopes that someone will purchase one of their listings. A high volume of listings is crucial for business brokers and they tend to have a low closing rate.
An M&A advisor tends to advise on more complex business transactions in the Lower Middle Market (ranging from several million to $100 million), which requires a greater understanding of corporate finance and the different parties involved with larger transactions. The buyers of these companies tend to be corporations in similar lines of business or investment groups that invest in private companies. When advising on a business sale, an M&A firm’s process starts by taking the time to gain a fundamental understanding of the business and what drives its value (at Blue Sky, this process is called the Business & Market Strategy Guide). The advisor may even work as a consultant for a period prior to the sale in order to maximize the value the business presents in the marketplace. Although an M&A advisory firm will provide the owners with a business valuation, at Blue Sky we take a unique approach. We do not assign a listing price to the business. The goal of the M&A advisor is to confidentially and actively market the business to a targeted list of potential buyers and bring multiple offers to the seller with the goal of leaving no money on the table. The M&A advisor will then lead the due diligence process and closing of the transaction. M&A advisors typically work on a handful of engagements at one time due to the complexity and time needed to devote to each transaction. This also provides clients with personalized service and attention.
Investment bankers that work in the M&A space operate very similarly to M&A advisory firms. Their process for valuing the business and confidentially taking it to market look the same. The main difference is that investment bankers operate in the Middle Market, typically working with businesses whose values are on the higher end of the spectrum and beyond ($100 million and greater). These transactions might involve securities that are registered and issued to the public. Investment banks are FINRA member broker-dealers and may offer other services such as public offerings of debt and equity.
If you are a business owner in the Lower Middle Market looking to sell, merge, or acquire, we at Blue Sky would love to speak with you about your options and best course of action.