Should You Hire a Business Broker or an M&A Advisor?

Selling your small business is one of the most important decisions you’ll ever make, and choosing the right team to help execute your exit strategy is key to a successful outcome.

You want a dealmaker familiar with your business, the most likely buyers for it, and the sales process. In other words, you want someone whose expertise is best suited to your individual situation.

For most entrepreneurs who are selling a small business, the choice boils down to going it alone, or hiring a business brokerage or M&A firm. (Investment bankers are another option, but these advisors usually work with much larger businesses and transactions.)

In this post, we’ll look at each option and how to choose among them.

Why Use an Acquisition Advisor to Sell Your Business?

Before we look at the services offered and differences between M&A advisors and business brokers, let’s first address the elephant in the room. As an entrepreneur, you might be thinking, “I built this company by myself. Why not sell it myself?”

There are a number of reasons why you should leave your business sale to an advisory firm:

To achieve the highest valuation. Arriving at a valuation for a business takes more than applying a formula to the company’s financial metrics. A professional acquisition specialist can best ensure that you don’t leave money on the table or price your business so high that prospects are unwilling to consider buying it.

Though business brokers and M&A advisors differ in the types of valuations they’ll provide, both will use comparable sales and market data, along with your business metrics, to ensure your business is priced well and fairly.

To move the deal forward efficiently. The old adage that time kills deals is sadly true. A seasoned professional can quickly anticipate and manage the inevitable bumps in the sales process so the deal isn’t delayed or derailed.

To market the business effectively. Marketing a business for sale takes an understanding of the business and the potential buyers for the business in equal measure. Not only do acquisition specialists have access to buyer pools, they also understand the needs of different types of buyers, and they can position your marketing materials to engage the greatest number of potential buyers.

To help guide the due diligence process. An experienced professional can help buyers navigate the due diligence process and prevent a deal from going sideways when buyers can’t access certain information or uncover hiccups that must be resolved.

To allow business owners to keep their eyes on the ball. Selling a business is a lengthy and complex process that takes time away from running the business. Business owners can easily lose focus when they’re spending time managing the sale process, resulting in missed revenue opportunities and, in the worst-case scenario, a lower valuation for the business. By hiring a professional, business owners can keep minding the store while the sale proceeds.

What Type of Advisor Is Best for Selling Your Business?

While M&A advisors and business brokers work toward the same goal—selling a business—the strategies they employ, the buyers and sellers they work with, and the deal size they handle are quite different.

What Is a Business Broker?

Most business brokers specialize in selling small, local businesses, though they can also work with lower-middle market companies. Their clients are typically independently owned businesses (often owner-operated) with revenues under $10 million. Similarly, the likely buyers for these businesses are entrepreneurs and independent owners rather than corporate or institutional entities.

Some of the clients business brokers typically service include Main Street businesses such as:

• hair and beauty salons
• auto repair and body shops
• dry cleaners
• pet grooming shops
• convenience stores
• single-unit restaurants and cafes
• bakeries
• appliance repair services, and
• yoga studios and spas

What Does a Business Broker Do?

Business brokers participate in all aspects of the sale process, including:

• marketing the business
• preparing the business valuation
• assisting with due diligence
• negotiating the deal
• help finalize the transaction

The scope of their involvement in the above activities, however, is limited as compared with an M&A firm. In many cases, sellers who work with business brokers will have to do a lot of the legwork themselves.

Marketing. Brokers promote your business and bring in potential buyers, all while maintaining complete confidentiality. Prospective buyers will receive a Confidential Information Memorandum (CIM) containing detailed information about the business's products, finances, customers, and real estate holdings.

Preparing financials and business valuations. With the help of a business broker, owners can compile accurate financial documentation to present to interested buyers. This might involve details on cash flow, profitability, and customer acquisition. The broker ensures that the information will not be disclosed to anyone other than qualified and interested buyers.

Preparing documents. Business brokers use standard sales documents and forms for non-disclosure agreements, purchase and sale agreements, and other legal documents. They’ll help walk sellers through the sale process, but you might consider putting together an advisory team that includes lawyers and CPAs to help ensure the “i’s” are dotted and “t’s” are crossed.

What Is a M&A Advisor?

Whereas a business broker’s participation in the sale process is centered on and limited to getting the deal done, M&A advisors often come in before the marketing stage and continue to work with clients after the deal is completed. They spearhead the entire process as consultants and strategic advisors.

An M&A advisor won’t simply collect a list of interested buyers who respond to marketing efforts. They will evaluate their client’s business to determine the types of buyers interested in the company and solicit the targeted companies with customized marketing materials designed to show how the business fits the prospect’s requirements for mergers and acquisitions.

M&A advisors typically work with national or international companies with revenues of $10 million or more, often with multiple locations and complex requirements, such as regulatory issues. The buyers of businesses brokered by M&A advisors might be corporate firms, institutions, or private equity firms.

What Does an M&A Advisor Do?

M&A advisors take a long-term, strategic approach to the mergers and acquisitions process. They might work with clients to help formulate an exit strategy and prepare the business for sale and they might continue their engagement with clients well after the deal closes by assisting with the disposition of sale proceeds or new acquisitions.

M&A firms perform a number of functions, including:

• identifying prospective buyers from a wide arena including national and international prospects, strategic buyers, and private equity firms
• employing complex valuation methods that can include considerations such as potential growth prospects and intellectual asset valuations
• applying different valuation models to determine the best approach
• setting up a competitive bidding process among buyers
• building strategies for reducing taxes and ensuring legal compliance
• developing financing structures for the sale
• preparing agreements and sale documents
• coordinating elements of the closing process

How Are Advisory Firms Paid?

Business brokers and M&A advisors differ in how they charge for their services.

Business brokers earn a commission based on the deal value, typically 8% to 12% of the sale price. The larger the deal size, the lower the commission percentage. Some business brokers require a deposit at the start of the engagement to cover expenses.

Fee structures for M&A advisors can differ based on the firm and the assignment. They too charge a commission–called a success fee–that is a percentage of the deal size, but they may also charge a flat retainer fee in addition to the success fee.

Success fees can range from 2% to 18% of the deal size, and here, too, the larger the deal size, the lower the success fee percentage. Retainer fees typically range from $15,000 to $30,000.

Both the success fee and the flat retainer are negotiated between seller and broker and can vary widely. In some cases, M&A advisors bill for services monthly, and they might credit the retainer against the success fee when the deal closes.

Choosing Between a M&A Advisor and a Business Broker

As noted, there are key differences between M&A Advisors and business brokers that make each best suited for different types of companies and different types of transactions.

If you are selling a small business with a single location, you use simple accounting methods like seller’s discretionary earnings, and your deal size is under $5 million, a business broker will likely fit your needs.

If your business has multiple locations, your financial accounting is complex, your valuation rests on your business’s future growth potential, and a potential buyer is likely to come from outside the locale where you operate, consider hiring a M&A advisor.

An M&A advisor will also be better equipped than most business brokers to shop your business to strategic buyers and private equity firms.

Another key difference lies in the types of acquisition financing brokers and M&A advisors typically work with. Business brokers typically work with buyers who use SBA loans and seller’s notes to finance deals. M&A advisors can also work with SBA-financed loans, but they also structure deals with debt financing, equity financing, traditional bank loans, and private lender funding, sometimes in combination.

In general, you’ll want an M&A advisor if your business is publicly held. While not always required, M&A advisors typically hold FINRA securities licenses for trading stock shares of a company.

Keep in mind that if your sale includes real estate, you’ll need an advisor with a real estate broker’s license. And many states require brokers and advisors to hold a real estate broker’s license to sell a business, even when no real estate is involved in the sale.

Selecting the right advisor for your needs requires a thorough evaluation. When deciding between an M&A advisor or business broker for your transaction, consider the business' revenue circumstances. For businesses with $10-50 million, M&A advisors are more suitable, while business brokers are better for those under $10 million. Having an experienced advisor or broker on your sales team is invaluable when valuing and selling your business. Visit the BizQuest Broker Directory to enlist a professional to help sell your business.