The difference between a business broker and an investment banker

The Best Option to Help You Sell Your Business

When looking to sell your business there is no doubt that getting expert assistance is the way to go. Retaining a firm to help you sell your business is ideal for both buyers and sellers of businesses.  After all, the main reason why you retain a mergers and acquisitions firm is to help you sell your business and so they can connect those looking to invest in buying a business and those looking to sell with benefits to both parties.  Also, because an expert mergers and acquisitions firm can help with financing, planning, strategy, industry contacts, legal planning and much more, all of which help to make buying and selling a business as seamless as possible.

In an ideal world, you would not need help in selling your business.  After all, who knows your business better than you?  However, the reality is that selling a profitable business is more complex than posting an ad on craigslist with highlights of your business.  Buyers always want details and sellers often don’t have the information organized as required.  Many times, business owners who work with a third-party mergers and acquisitions firm end up finding out several details they were not aware of after a proper valuation of their business.

In reality, there are two proper ways you can go about selling a business.  The first: flying solo.  Get a good legal team and accounting firm, read up on procedures and pretty much become an expert at marketing and selling your business on several levels.  Second: retain a mergers and acquisitions firm that will guide you through the complex process and find you the best offer possible.

Selling Your Business – DIY

If you are looking to go it alone into the world of mergers and acquisitions to sell your business without assistance, it’s not unheard of, especially for very small businesses with little or no overhead.  Just be prepared to have a decent budget for marketing and advertising as even craigslist now charges to post on their online platform.  You will also want to retain a good attorney to look over all logistical legalities.  Make sure to retain an accountant to ensure accurate bookkeeping records for the last few years.  Research how to do a proper valuation of your company, then advertise on all platforms and network with the right people to get the word out that your business is for sale.  At that stage, if you your marketing approach was right, you will have to screen responses to your ads, including the inevitable questions such as “do you offer financing?”

Selling a business on your own really means you have to become an expert.  Just as people that sell a home on their own without an agent quickly realize, there is more to it than just posting a FOR SALE sign outside their home.  Business owners looking to sell their business without a business broker or investment banker also quickly realize that the above is just the start of the process of selling your business.  If you are a profitable business with experienced staff, inventory, overhead and projections of a growing business, you definitely don’t have the time to go it alone.

So, if you don’t have the time to become a mergers and acquisitions expert in order to sell your business, you have two options: retain a reputable business broker, or an investment banker.  Both business brokers and investment bankers work in the mergers and acquisition industry.

However, both offer different services and cater to certain types of businesses.

Mergers and Acquisitions

So, what exactly are mergers and acquisitions (M&A)? M&A are transactions in which company ownership is either transferred or consolidated with another business entity.  When you sell your business to a buyer who is an LLC you are part of an M&A business transaction.

Merger and Acquisition Firms

The M&A process is time-consuming.  In fact, the whole financial process is overwhelming and then there are legalities, government regulations and accounting.  That is where a merger and acquisition firm can help facilitate the process by guiding business sellers on the entire process.

Two types of merger and acquisition firms are discussed below.  Both types of M&A firms have a specialist to help successfully sell or buy businesses, but they both differ in approach and the focus of business type.  The first, business brokers, and second, investment bankers, are both experts in the M&A field when it comes to buying and selling a business.

M&A Experts: Business Brokers vs. Investment Bankers

The two major types of a specialist in the M&A process of selling and buying a business are business brokers or investment bankers.

Business Broker

A business broker will handle both large and small M&A business transactions.  Some brokers do have a threshold in the value that is made available at valuation in the USA.  Most M&A deals are made by business brokers.  From a smaller business that is family-owned to large corporations, a good business broker will be able to successfully complete your M&A transaction.

Just like a good real estate agent can make your home-buying or selling process a breeze, a business broker will market your company to interested qualified-buyers.  Qualified expert business brokers also guarantee the confidentiality of the sale of your business.  The seller works with a qualified business broker to value the company and come up with an asking price before it is offered.  Then the business broker will handle the entire process and negotiate a good price.

After you retain a business broker to help you sell your company, you come up with the valuation process.  The business broker fields through all inquiries of a prospective buyer and selects only qualified ones.

A good business broker makes sure to execute a confidentiality agreement or non-disclosure (NDA) depending on the legalities.  This is a way to protect sensitive information from competitors, or prevent employees from knowing about the business transaction before it is completed.

A buyer or entity looking to invest in a business has to sign the NDA.  Then the broker makes sure the business books are prepared and, at this stage, there is usually interest or an offer made for the business.  After negotiations, a price is settled and terms for the transfer of a business are made.  A good business broker even offers finance options for the buyer.  Brokers usually charge a commission or fee for facilitation of the M&A process.

Business brokers vary in their fields of expertise and the services they offer.  For a qualified expert business broker in the Los Angeles area contact our office who will strategize the best options to maximize your M&A business transaction to both buyers and sellers.

Investment Banker

The term or title “investment banker” can be pretty broad with regard to duties and role.  One thing is for sure: investment bankers work with larger financial institutions.  For many years after 1933, there was a key provision in banking legislation that regulated what entities an investment banker could work with on a commercial level.  However, since the late 90’s regulations have been freed up and the term or position “investment banker” is applied more in corporate financial firms.

Investment bankers usually work with M&A transactions ranging from $50 million to over $500 million, which are classed as middle and large market transactions.  The larger investment banks only consider billion-dollar transactions, while some smaller financial institutions will consider a smaller threshold.

Most investment bankers deal in securities.  In order to deal in securities, bankers need to have licenses issued by the SEC, monitored by FINRA, and work with state and federal regulations.

An investment banker will not be like a real estate agent or a business broker.  A business broker will work at getting the best deal for your transaction, whereas an investment banker likes to create buzz and hold a controlled auction amongst exclusive buyers at the same time.

If an investment bank or financial firm’s mergers and acquisitions department agree to sell a business, they agree to do sell-side work or target representations.  Sell-side projects usually bring more profit.

Part of their process is not just to create a stable valuation for the business on sale, but also several valuation models for various scenarios.  This can take a few months to come up with and also determine a range of what the business is potentially worth.

The investment banker will reach out to a potential exclusive network of buyers.  After a non-compete or disclosure agreement is in place, the investment bank will start an auction between several prospective buyers.  They create a summary of the business sale offer, known as a Selling Memorandum.

If a business entity interested in buying a business needs financing in order to complete an M&A transaction, the investment bank will raise the funds necessary to complete the purchase.  Funds can come from multiple sources and are usually complex transactions before the initial sale of a business.

Investment bank firms usually charge a non-refundable retainer of hundreds of thousands of dollars as part of their fees.  Then, after the business sale is complete, investment banks charge on a scale-down success percentage fee: 10% for the first $1 million, 9% for second million and so on.  Expect to pay a high retainer and large amounts in “success fees” compared to a business broker.

Is retaining an M&A Firm Necessary to Sell Your Business?

Most business sellers going at this the first time can find the experience overwhelming, and ultimately time-consuming.  Assembling a team of experts from legal to marketing can also be costly if you go at it alone.  Selling a business requires experts in order to legally and successfully sell a business.

An M&A firm representative will save you a lot of agonies and ensure a better offer on the sale of a business.  With several firms online and locally to do business with making sure that, ultimately, you screen all of them.  Working with reputable investment banks and proven business brokers you can trust is key to the success of selling a business.

For those that are financially savvy, understand financial markets, know financial and legal advisers to get due diligence in order, and possess marketing and negotiating skills, going with an M&A firm and expert is not for you.

Who to work with: a Business Broker or Investment Banker?

The simple way of choosing an expert to get your M&A transaction going is by looking at the value of your business.  Most investment banks only take on companies starting at a value of $10 million.  For larger company acquisitions that require major financing and licenses, an investment bank is the way to go.

An investment banker will work with large corporations or established uber-wealthy individuals.  Business brokers, on the other hand, work with both smaller and larger business types, from startups, e-commerce and other profitable businesses looking to sale.

Working with a business broker that specializes and has experience in your industry is important.  Dealing with experienced and qualified business broker firms  is the best option for most businesses.

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