Which is Best – Business Broker, M&A Advisor, or an Investment Banker?

When selling a business, you’ll likely engage various advisors to help you navigate the process, maximize the sale price, reduce risks associated with the deal post-transaction, and ultimately close the deal. Different types of advisors work in various business sales roles. They may assist in the transaction, each with unique expertise, deal process, and fee structure.

In this post, the objective is to help you understand:

• The different types of business sale advisors who represent you and precisely what they do
• The difference between a Business Broker, M&A Advisor, and an Investment Banker
• How much do Business Brokers, M&A Advisors, and Investment Bankers charge for their services
• Which type of business brokerage advisor is the best choice to sell your business

Buy and Sell Business Advisors

The three primary types of advisors representing you in selling a business are Business Brokers, M&A (Mergers and Acquisitions) Advisors, and Investment Bankers. Which is best to work with when you take your business to market depends on several factors I’ll cover in this post.

Here’s an overview of each type of selling advisor and what they do:

Business Brokers

A business broker typically handles the sale of small to mid-sized businesses. Generally, they don’t take deals exceeding several million dollars, and their process to sell the companies they represent somewhat differs from the method offered by M & A Advisors and Investment Bankers. A business broker’s primary role is a facilitator, where they help connect buyers and sellers and work with both parties to complete the transaction process.

Most Business Brokers (and their brokerage firms) offer these services to business owners when they represent them:

• Business Valuation: The business broker assesses the business operations, financial records, customers/clients, competition, and other essential factors to determine a fair market opinion of value. Determining the value of the business is vital before putting the company on the market. Hence, the business owner has a reasonable understanding of what buyers may be willing to offer the business owner for their business based on the business broker’s knowledge and experience.
• Marketing the Business For Sale: The business broker will prepare introductory marketing materials as well as more in-depth written materials for buyers to review; create digital marketing listings on business for sale websites; contact their active buyers and other business brokers who may represent buyers to share information about the business for sale.
• Screening Potential Buyers: The business broker will verify that the potential buyers are financially able to purchase the business and will require such buyers to sign Confidentiality (aka Non-Disclosure Agreements) to protect the seller’s interests.
• Negotiate Offers: The business broker will communicate directly with all buyers and negotiate offers received on behalf of the seller.
• Due Diligence: The business broker assists their clients as they undergo the due diligence process.
• Documentation: The business broker may assist with the preparation of the necessary documents for the sale and facilitate the work other professionals must do.

Business Broker Fees

Business brokers usually charge a commission based on the final sale price and any other value transferred from the buyer to the seller. Business brokers are generally compensated at the end of the selling process during the closing. The business broker’s commission typically ranges from 10% to 12%, although rates will vary and may be negotiable.

M&A Advisor

An M&A (Mergers & Acquisitions) Advisor specializes in mid-sized to larger business transactions, often referred to as deals in the lower-middle market. Such firms are considered boutique M&A firms, and many of their professionals started their careers at an investment bank working on substantial M&A transactions.

The transaction size for an M&A Advisor typically ranges from $5M-$75M, and many boutique firms or their Managing Directors specialize in specific industries. This type of advisor handles more complex transactions than a business broker and works very closely with other deal team advisors such as attorneys and CPAs so they may provide an optimal outcome for sellers.

When an M&A Advisor represents a seller, they offer the following services:

• Business Valuation: The M&A Advisor has a team of Analysts they rely on to research the business thoroughly while developing their business valuation. The company’s value range will be created for the business owner to consider before going to market.
• Identifying Potential Buyers: The M&A Advisor will have a broad network of potential buyers and industry connections they will approach when the business is marketed. An emphasis on approaching strategic investors is common for M&A advisors.
• Confidential Information Memorandum (CIM): The CIM will be developed, along with introductory information for potential buyers, and it will take weeks and, in some cases, several months to create.  
• An Auction-like Selling Process: A timeline to sell the business is agreed upon between the M&A Advisor and the seller, emphasizing targeting a date or week when all Letters of Interest are to be delivered by potential buyers. This sell-side M&A process differs from how business brokers work.
• Outreach Marketing: The M&A Advisor uses marketing techniques to attract potential buyers. They contact their extensive network and work the phones to attract potential buyers. Having standing NDAs in place with its network of buyers is not uncommon for an M&A advisory.
• Letter of Interest Negotiation: Once the buyers have established interest in the business after meeting with the seller and a Letter of Interest is delivered, the M&A Advisor negotiates the deal terms until a Letter of Intent is agreed upon.
• Due Diligence: Like a business broker, the M&A Advisor and their team will facilitate the due diligence process.
• Negotiation of Deal Terms: The M&A Advisor, in tandem with the seller’s M&A Attorney, will negotiate the final terms and conditions in the Asset Purchase or Stock Purchase Agreement on behalf of the seller.
• Closing Coordination: The M&A Advisor’s deal team members will coordinate with the M&A Attorney the closing documentation and process.
• Post-Closing Details: Typically, some matters need attention from the seller post-closing. The M&A Advisor will assist the other deal team members as necessary.

Most business owners who have successfully closed their deals with the assistance of an M&A advisor will tell you the most significant value they received was the sale process management. Selling a business is a unique and challenging process that involves sourcing buyers, serving as a buffer between the potential buyers and the seller, negotiating deal terms, and limiting distractions for the seller and their management team, among other important matters.

M&A Advisor Fees

The M&A Advisory firm dedicates more than one advisor when they represent the business owner selling their business. They assign at least one Business Analyst and Associate to every deal. For this reason, it’s pretty standard for the firm to charge a retainer fee plus a success fee, with the success fee typically being a negotiated percentage of the deal value. 

Since the pandemic, advisors of all types are charging more for their services. The M&A Advisors are doing the same. Depending on the deal size in the lower-middle market, the success fee range is as follows:

• 4% to 6% for deals with $5M-$10M total enterprise value
• 2% to 4% for deals with $20M-$50M total enterprise value
• 2% to 3% for deals with $50M-$75M total enterprise value

In some instances, any out-of-pocket expenses are also the seller’s responsibility. Upfront retainer fees can range from as little as $5,000 up to $50,000, and the M&A advisor may require monthly retainers.  The typical upfront retainer fee is between $25,000 and $50,000.

Most M&A Advisory firms also set a minimum success fee, especially in smaller deals.

The factors that affect where the M&A Advisor fee lands, beyond deal size, include the transaction’s complexity, the overall current M&A activity in the market and the M&A advisory firm itself, the riskiness associated with actually closing the transaction, and whether multiple advisors are bidding for the work. 

Some M&A advisory firms structure their fees in tiers where a valuation target is set with a specific success fee, with increments above this target valuation allowing them to earn successively higher fees. For example, a $60M target valuation could earn a 2% fee, while the next $10M earns a 3% fee. In such case, the M&A advisory firm would be paid $1.5M ($60M x .02 or $1.2M plus $10M x .03 or $300K)

Investment Banker

Investment bankers typically handle large, complex deals, including mergers, acquisitions, and capital-raising engagements. They provide comprehensive financial advice, research, deep industry knowledge, access to a vast network of potential buyers, international opportunities, and expertise in structuring deals. 

The investment banker is one member of a much larger group of specialized advisors at the investment bank who provide other complex services in equity advisory (IPOs), corporate restructuring advisory, capital advisory matters, and investment management.

Most investment banks won’t handle deals under $100M, and many require much larger enterprise value to work with them.  

Investment bankers generally do the same work for sellers offered by M&A Advisors in boutique M&A firms. The difference is the value of the businesses they represent, the amount of work required to close a more significant, more complex transaction, and their firm’s ability to assist in raising capital if needed.

Investment Banker Fees

Like the M&A advisor, the investment banker fee includes retainer fees, success fees, out-of-pocket expenses, etc. It is based on the size of the transaction. The fee range for deals with an enterprise value over $100M is generally between 1%-2% and decreases as the deal’s enterprise value increases.  

Which Business Brokerage Advisor is Best?

Ultimately, the choice of your business brokerage advisor must align with your business enterprise value and the complexity of the proposed transaction. Suppose your business is valued at a few million dollars. In that case, you will work with a business broker when selling your business. And that’s because M&A advisors and investment bankers do not work with small businesses.  

Similarly, the value of your business and its deal complexity will determine whether an investment banker would be well-suited to assist you when selling your business.  

Regardless of which advisor your business is the best fit to work with, it’s important to interview potential advisors to find the right representative.

Remember that the specific services and fee structures may vary among professionals and firms, so discussing your needs and expectations with potential advisors is essential before deciding. Additionally, consider seeking recommendations and conducting due diligence to choose an advisor with a proven track record in your industry.

There are other types of professional business advisors you will need to sell your business successfully in addition to your selling representative. They may include CPAs or a tax advisor, an attorney well-versed in business sale matters or M&A transactions, Human Resource specialists to address employment issues, and possibly an escrow agent. 

Selling your business happens only once, so there are no do-overs. Experienced deal advisors are essential to successful business sales.