Industry Trends
Largest Transactions Closed
- Target
- Buyer
- Value($mm)
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Selling your business is one of the most significant financial decisions you'll make, and navigating the complexities can feel overwhelming. With countless considerations, from transition planning to finding the right buyer, the process demands careful thought and strategic preparation. The key to a successful sale lies in the expertise of a skilled transaction professional.
Whether you're contemplating your exit one to two years in advance or have already started exploring your options, this guide is designed to illuminate the path forward. Understanding the distinct roles and qualifications of investment bankers, M&A advisors, and business brokers is crucial. Each brings unique skills and perspectives tailored to businesses of varying sizes and complexities.
In this comprehensive guide, we’ll delve into the nuances of each type of transaction professional, helping you discern the right fit for your needs. We’ll also explore the potential pitfalls of going it alone and why leveraging professional expertise can lead to a more favorable outcome. Join us as we unpack the essential factors that will empower you to make informed decisions, ensuring your business transition is smooth and profitable.
Investment Banker
Boutique vs. Bulge
Investment banks can be classified in two categories: Boutique investment banking firms work with businesses in the middle market range, usually valued between $10 and $500 million. Bulge bracket firms, in comparison, focus on deals with companies valued at greater than $500 million.
Both types of investment banks execute roughly the same sale process. The investment banker will first perform thorough due diligence to determine the value of your company, and then market your company through a targeted or broad auction procedure to find potential buyers. This process typically leads to multiple offers, which allows the investment banker to negotiate the best deal for you. Keep in mind that this is a high-level synopsis of what occurs during the transaction. Along the way, a good investment banker will also coach you in making your business more attractive to buyers and assist you with overcoming any unforeseen hurdles.
Only you can determine whether it’s best to hire a boutique firm or a bulge bracket firm, and you should take time to investigate firms thoroughly before hiring. Of course, the size of your company may dictate this decision. Boutique investment banks, simply due to the scope and nature of the firms they handle, will typically provide senior-level support on all transactions. If you’re hiring a bulge bracket firm, however, make sure you understand who will run your deal. Will it be a senior-level or a junior-level investment banker? When it comes to negotiating your transaction and providing suitable advice throughout the process, this individual’s standing can make all the difference.
Qualifications and Licensing
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As you explore the options available to you, researching the qualifications and past successes of various investment bankers is a must. Look at both educational history and professional experience, as prior work in the finance industry or entrepreneurial experience affords an investment banker the solid skill set and knowledge required to provide accurate guidance throughout the sale process. Also be sure to review accreditations and association memberships, which can bring added skills and a network of connections. Finally, examine any successfully completed transactions to gain insight on the number and value of those transactions. All this information should give you an indication as to whether your chosen investment banker is familiar with your industry and has the expertise to close your transaction favorably.
Equally important when considering various investment bankers for your transaction is understanding the regulatory licenses they hold. The investment banking profession is regulated by both the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), and investment bankers are required to pass the Investment Banking Representative Exam, also known as the Series 79. According to FINRA, this exam “measures the degree to which each candidate possesses the knowledge needed to perform the critical functions of an investment banking representative,” which includes “advising on or facilitating debt or equity offerings through a private placement or public offering” as well as mergers and acquisitions, tender offers, financial restructurings, and asset sales. Determining whether a person or firm is licensed through FINRA is easy to do by searching the names through http://brokercheck.finra.org/.
Once you have vetted the investment banker’s qualifications and licenses, you need to ascertain your level of trust in this person and the firm overall. When hiring an investment banker, you are most likely putting your biggest financial asset in their hands, so speak honestly about your goals and expectations. Feeling that the investment banker has your and your company’s best interests at heart is crucial to a successful sale process.
M&A Advisor
“M&A advisor” is a self-designated title used by individuals in lieu of “investment banker,” often when they lack specific approval by the SEC and FINRA, although the individual might have obtained certifications from various associations related to M&A transactions. Some M&A advisors provide only consultative services, delivering strategy and planning advice related to exit planning or liquidity options for their clients. Others execute a complete deal process in much the same manner as an investment banker does.
When dealing with an M&A advisor, be sure you know whether this individual is properly licensed to sell a company in your state, especially if your transaction involves securities. And of course, as stated earlier, you must properly evaluate the skills and experience level of anyone you plan to hire for guidance about the future of your business.
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Business Broker
A business brokers is generally hired to sell smaller businesses—those valued at less than $5 million, such as restaurants, small manufacturing shops, print shops, etc.—and most likely has a real estate agent/broker’s license. These brokers can only sell the business’s assets and are not allowed to facilitate or receive a fee in a stock transaction.
Because small businesses are usually less complex, the process to sell them is relatively simple. A business broker will assist you in establishing an asking price for your business, and typically takes a passive approach to selling by listing the company online or in a newspaper. Some business brokers have ready contacts, however, and may be equipped to make an introduction quickly. As with selling any business, the time it takes to find a buyer can vary. The business broker then charges a fee based on a percentage (usually 5% to 10%) of the business’s sale price.
It bears repeating that before hiring anyone to sell your business, make sure you know their qualifications. Each state has different regulations regarding the qualifications required to sell a company. Many states require business brokers to have a real estate license, but others do not regulate business brokers or M&A advisors in any way, and do not even require a license to perform such transactions.
Before embarking on the sale of your business, make sure you understand the rules in your state. Only investment bankers, due to federal oversight of their profession, are allowed to represent companies in all 50 states.
Don't Go It Alone
While it might be tempting to sell your business without an intermediary, studies show that partnering with an investment banker leads to better outcomes. A 2018 study titled "Does Hiring M&A Advisors Matter for Private Sellers?" found that hiring a professional leads to higher deal valuations, better-negotiated terms, and added value.
Higher Deal Valuations
The study reviewed 4,468 acquisitions of private companies from 1980–2010 and found that sale price premiums for transactions overseen by an investment banker were on average 27% to 37% higher than those without a professional.
Better Negotiated Terms
Investment bankers add credibility to the sell-side of the deal, decrease the buyer's sense of control, see synergies among prospective buyers, and advocate for the seller to negotiate higher valuations.
Added Value
An investment banker brings added value by identifying a larger pool of potential buyers, providing a valuation analysis, suggesting ways to increase the business's value, evaluating offers, and managing the auction process.
A Final Note
Hiring the most suitable professional to sell your business is essential. Take the time to learn about your options and what each professional can offer you. The right professional can help you prepare your company for sale and ensure a profitable outcome.
Transaction Professional Quick Reference Guide
