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Investment Banking vs. Business Brokering

By Jeffrey Lewis, on November 16th, 2021

When it comes to selling your business, picking the right type of advisor is critical. In this article, we’ll explore the differences between the two primary choices in the market: business brokers and investment bankers.

Business Brokers:

In many respects, engaging a business broker to sell your business is similar to hiring a real estate agent to sell your house. The business broker will typically have a good understanding of the local market in which your business is located. They will also typically have data about recent sales of similar business in that market. They will meet with you to obtain some cursory information about the business, review recent financial information, and provide advice regarding setting an asking price. Once engaged, they will ask you to prepare a brief written narrative about the business and will then market the business to potential buyers via online postings to various websites and broad email blasts. Not unlike a real estate agent, they will then wait for potential buyers to contact them. If all goes well, the buyer and seller will come to an agreement regarding transaction price and structure, and the business broker will collect his or her commission at closing. For most small businesses in the U.S., this is how the process is done. It is often a perfectly reasonable approach.

Investment Bankers:

Investment bankers, on the other hand, operate much differently. They are generally nothing like real estate agents. Investment bankers utilize a very time consuming and active process to prepare a business for sale, create a list of potential buyers, actively contact potential buyers and solicit interest, coordinate the flow of information between the parties, and actively negotiate with market participants for the best price and terms for the seller. They do not set a price for the business. Instead, they let market participants decide what the business is worth. They also typically market your business to other businesses or private equity funds, as opposed to individuals. The likely buyer for your business is often the key characteristic in determining which type of advisor you should engage to sell your business.

Investment bankers will typically charge an up-front fee (to offset a portion of their costs related to preparing the business for sale and marketing it) and a success fee on the back end. If they are unable to find a buyer and help the parties close a transaction, the seller is only out-of-pocket for the up-front fee.

Due to the level of time, effort and experience required to sell a business this way, the process is usually cost prohibitive to very small businesses. Therefore, investment bankers typically have minimum size requirements for the businesses they represent (and they also typically have minimum fee requirements).

Summary of Key Differences:

The following table summarizes the primary differences between business brokers and investment bankers.

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In Summary:

There is absolutely nothing wrong with a small business owner using a business broker to sell their business. In fact, for a lot of businesses, it’s really the only choice. The problem, however, comes when a middle-market business owner uses a business broker to sell their business. And unfortunately, business brokers are all too happy to take them on as clients. However, these types of businesses are often in high demand, and unless an investment banker is used to “clear the market” of corporate and private-equity buyers, it’s hard to know just how much money was left on the table.

Having been in the investment banking business for many years, there is no doubt in my mind that businesses sold using a disciplined sell-side investment banking process derive higher selling prices and better terms, which more than offset a good investment banker’s fee. The investment banker’s ability to bring potential buyers to the table, communicate the value of the business, negotiate deals, and avoid common pitfalls can be worth his or her weight in gold.

If you’re considering a sale of your business, please contact us to discuss options. Your business may be a good candidate for our process. If not, we’d be happy to introduce you to a business broker that would be a good fit for you.

Jeffrey G. Lewis is a partner and Investment Banking Team leader at the Bonadio Group, a nationally ranked, Top 50 accounting and consulting firm. He oversees the firm’s Investment Banking and Transaction Advisory teams, which specialize in sell-side investment banking and transaction advisory services.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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Written By

Jeffrey Lewis June 21

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