31 Jan Business Broker vs. M&A Intermediary
We often get asked what the difference is between the Business Broker and the M&A Intermediary. We went to our archives to see if we could find an article or two on the subject. We found two articles written by Russ Robb, a very successful M&A practitioner.
Russ’s thoughts on what a business broker does.
They generally represent companies under $3 million in sales.
1) Normally they do not require a retainer to list the business, but their commission as a percentage of sales can be up to twice the Lehman or modified Lehman formula. Business brokerage listing agreements are predominately for a twelve-month exclusive period, which is longer than M&A intermediaries.
2) Business brokers generally list the asking price plus inventory and a suggested down payment. Brokers frequently advise the seller to withdraw the cash post closing and/or peg the working capital at zero. Middle market intermediaries generally do not operate this way.
3) Brokers will often times base the company’s price on rules of thumb for particular businesses and/or a multiple of sellers’ discretionary earnings, which are earnings, owner’s salary, all owner’s compensation and perks. The theory is that the acquirer is in essence “buying a job” so the focus is on total personal return on investment.
4) Balance sheets are not usually provided as the sales price is generally predicated on assets such as goodwill, plus fixtures and equipment being sold on a free and clear basis.
Quite a few business brokers move up to the larger companies with sales, for example, from $2 to $20 million. The acquirers are more apt to be corporate buyers who are accustomed to using different valuation metrics, i.e., multiple of EBITDA with some but not all add-backs to earnings.
A Second Article
Russ also did an article for his book, ”Selling Middle Market Businesses: Guide Book for Intermediaries (available through BBP at www.businessbrokeragepress.com) with the following list of differences between a general business broker and an M&A intermediary.
The business broker generally sells businesses $100,000 to $3 million made up of retail stores, food establishments and small service businesses. The documentation consists of a minimal or short write-up. The buyers are generally local individuals. The compensation is generally no retainer and a commission of 10% to 12%. The business brokers use the internet, email and local advertising to sell the businesses and carry a much larger inventory of businesses for sale. The listing period usually ranges from 6 months to 12 months. Confidentiality is extremely tight with visits often made after hours. Financial information usually consists of profit and loss statements, tax returns or unaudited figures. The decision maker is almost always the owner. The sale from listing to closing is approximately six months.
Now for the M&A intermediary. The sale price can range from $3 million up. The types of businesses sold are manufacturers, distributors, wholesalers and large service operations. The documentation is generally a 30 to 50 page Offering Memorandum. The buyers are private equity groups, strategic buyers and both national and international companies. A retainer is almost always required with a minimum fee of $150,000 plus; usually some form of the Lehman formula which is 5% of the first $100,000, 4% of the second $100,000 etc. The method of selling is a controlled auction for buyers, focused direct mailing and the use of in-house buyer lists – all generally specific industry focused. As opposed to the use of last year’s P&L, M&A deals require extensive financial analysis.
One area not mentioned in the material we reviewed is the number of outside professionals that get involved in the M&A deal.
Interestingly, Russ made a comment that says it all. “A business broker moving up the food chain should try not to be overwhelmed with the challenge of properly representing mid-market companies for sale. He or she should not be intimated just because the deal is larger or because the level of sophistication is greater., particularly if the broker has the following attributes:
• A successful track record of closing deals
• An engaging personality with candor and honesty; after all, business is in large part about people skills.
• An ability to successfully solicit and sign up new clients (listings).”
