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M&A: Business Brokers and Investment Bankers

Intermediaries for M&A deals come in two flavors: investment bankers and business brokers. An investment banker likely provides a fuller service for a Seller, but that fuller service usually means higher fees.

Investment banking firms are more expensive because they have more overhead. In other words, they have more professionals (including specialized employees such as business development teams, researchers, and a host of analysts) and often fancier offices in fancier buildings. All those extras cost money.

In a very rough sense, the revenue threshold for working with an investment banking firm is $10 million. Companies with revenues north of $10 million will most likely be able to afford the fees associated with a full-service firm.

For companies under $10 million in revenue, a business broker probably makes the most sense; transactions that small probably won’t interest an investment firm.

A business broker does much of the same work as an investment banker does, just with fewer people and lower overhead. In some cases, the broker is the person who signs the new client, writes the offering document, conducts the research, develops the target list, makes the calls, organizes the meetings, and negotiates the deal.

The broker can charge a lower fee and still make a good living, but the extent of the service won’t be the same as a larger firm, simply because the larger firm has more resources.

Brokers are more apt to work on a contingency basis, meaning they’re often willing to only get paid if a deal successfully closes. Investment bankers probably will require an initial retainer, monthly fees, and a success fee.

Due to recent changes in securities laws, both Sellers and Buyers should work with an intermediary that is affiliated with a regulated investment firm (called a broker-dealer). Any individual involved in transacting an M&A deal needs to be registered with the Financial Industry Regulatory Authority (FINRA).

Basically, this entity makes sure people involved in securities transactions haven’t committed financial crimes and also have a certain level of financial proficiency. To become registered, an individual needs to pass a couple of securities exams — usually, the series 7 (or 79) and series 63.

When hiring a firm to conduct an acquisition search, make sure you ask who is making the calls to business owners: an experienced professional or some kid straight out of business school?

Some M&A firms that focus on acquisition search work are little more than “dialing for dollars shops.” Often these firms utilize the boiler-room approach — that is, packing a slew of young people into a room and having them make call after call after call with little or no thought about what they’re saying or to whom they’re speaking.

Don’t allow one intermediary to represent both sides. Representing both sides is a conflict of interest. Anyone who offers to represent both sides is inept and/or is acting in a highly unethical manner.

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