Investment Banker or Broker?

Quick Summary


Below is a summary of the key roles played by Investment Bankers and Business Brokers alongside a comparison to RJMA’s Sell Side Quarterbacks who can combine business consulting, executive coaching, business broker and investment banking services as needed.

What is a Sell-Side Investment banker/M&A Advisor?

Sell-side M&A investment bankers are typically responsible for all stages of the sale from company preparation to developing marketing materials and bidder lists all the way through the execution of the sale process and closing.

  • Typically only represent companies $50 million in enterprise value or higher.

  • Does not usually set or indicate the price of a transaction but rather provides information to allow for a competitive yet confidential auction. It is the presence of alternatives that gives a buyer the negotiating leverage to help them maximize the terms of their transaction.

  • Long before the sale process starts the investment banker helps prepare the business for sale. These adjustments can range from improving working capital efficiency to documenting procedures and cleaning up accounting; this process can take a year or longer so it is important to build your advisory team early.

What is a Business Broker?

A business broker’s process is similar in many ways to that of an investment banker but there are a few key differences.

  • The CIM will usually be abbreviated (think of the Cliff’s Notes version of a CIM)

  • Primarily attract buyers by listing your company on their website (and may selectively reach out proactively to potential buyers)

  • The offering price and key terms will be spelled out in the opening discussion with a potential buyer

  • Typically operate in a local market and/or a specific industry

Due to the differences in the level of service offered, business brokers typically work with smaller businesses that don’t fit with investment bankers.

Fees

Another key difference between an investment banker and a business broker is how they calculate fees. Both investment bankers and business brokers usually charge a success fee. This fee is paid at closing and is usually driven by the size of the transaction…the more it sells for the higher the success fee. The difference is that business brokers will charge a declining percentage, such as 10% on the first million dollars, 8% on the second million, and 5% on anything above that, as an example. This is because brokers work on smaller transactions that still require significant work. Conversely, an investment banker will usually agree on a reasonable sale price and fee with the seller and charge a higher percentage to the extent the actual sale price exceeds that expectation.

Summary

Overall, an investment banker will offer a much higher touch and customized approach for a seller while a broker will work on smaller deals and the approach is more like a commercial real estate process at times. If your company is large enough to warrant an investment banker, most sellers would prefer them as an intermediary because of that high touch. Business brokers may be a good option for smaller companies where the buyer is more likely to be local.