DON’T USE A BROKER TO SELL A HIGH VALUE BUSINESS
If all they are doing is introducing you to buyers, you might as well be on your own.
“What’s wrong with using a broker?”
Nothing, if you have a very small business. For high value businesses you need full advisory support.
“Wait, what? Brokers provide advisory services.”
No, they don’t.
Not in anywhere near the same level of depth. It’s only after you sign up with one and get started that this becomes clear. Much of the advisory support you are expecting does not exist with these services.
Let’s start at the beginning.
There are four ways you can work with a buyer or buyers to sell your business:
On your own, with no commercial support (only legal)
Be introduced to them via an “introducer”
Through a “broker” or sell-side marketplace
With full M&A advisory support
The first two are very similar to each other. The third adds some value and can be a good choice for very small businesses. Only the fourth option, using a serious M&A advisory firm, adds substantial value.
We’ll touch on the curious phenomenon of the “introducer” towards the bottom of this post. These people add little (and sometimes negative) value. Note that “buy-side marketplaces” do not work for the seller and are therefore in the category of mere “introducers”, from the seller’s perspective.
The bulk of this article will deal with the differences between brokers and M&A advisory firms. This topic is not widely understood but it is of critical importance if you are planning to sell your business.
While it is well known that M&A advisory firms achieve better results for their clients than brokers do (higher valuations, better terms, higher likelihood of closing), what is not often discussed is the difference in what they actually do that leads to these better results. This will be the focus of this article.
How Are Brokers Different To M&A Advisory Firms?
There are huge and important differences, far beyond the creation of a CIM. We will explain the differences and when you should consider using each type of firm to bring your business to market.
Brokers and sell-side marketplaces are in the same category, because their approaches are very similar. They both tend to advertise businesses for sale, they both focus on having a large “list” of secret buyers, their approach is relatively passive rather than proactive, they both tend to use technology to automate some processes, and they both handle a great many clients at a time, providing a relatively low level of support and tactical guidance compared to M&A advisory firms. So when we say “brokers” we are including the sell-side marketplaces who help sellers to “flip” their businesses.
We are not including “introducers” under the blanket term “brokers” here. There is a separate note about “introducers” further down. In this comparison, “brokers” are only sell-side brokerage firms and sell-side marketplaces.
1. Number of Clients
This is a key point. Many of the differences between brokers and M&A advisors stem from this.
Brokers
Brokers taken on a great many clients at a time. They pride themselves on the number of sellers in their network, the number of live deals, the number of closed deals etc. Everything is focused on scale. This is why they must operate very efficiently, using templates as much as possible, and cannot devote time to things like strategy or being with you on all of the due diligence calls.
M&A Advisory Firms
M&A advisory firms only work with a small number of clients at a time. The bespoke, strategic nature of their work and the extensive support they provide prevents them from working with more than a handful of clients. This naturally feeds through to better results.
2. Approach To Finding Buyers
Brokers
Brokers and sell-side marketplaces rely on two main tools:
· Advertising the business for sale publicly on their website
· Emailing the business (which they call a “listing”) out to their secret “list” of buyers
This marketing approach is largely passive.
M&A Advisory Firms
Advisory firms use targeted, confidential approaches:
· Identifying strategic buyers & PE firms who are a good fit and reaching out to them
· Working with institutional buyers already in their network
This approach is proactive, rather than passive. Identifying strategic buyers, pitching them, bringing them into the process and convincing them to acquire requires a lot more work.
3. Analysis
Brokers
These firms will seek to:
Understand the main metrics of the business, using a template approach for efficiency
There is some variance within brokerage firms here – some devote more time to this than others
M&A Advisory Firms
These firms:
Conduct business analysis to truly identify all of the opportunities inherent within it
Have specialist market knowledge of what buyers are looking for and how they need to have the information presented to them
4. Marketing Materials
Brokers
Brokers and sell-side marketplaces will create:
A fairly brief summary capturing standardised metrics, usually as a website listing or PDF generated from the website listing
M&A Advisory Firms
These firms will create and use:
Confidential information memoranda: detailed, graphical documents presenting a thorough analysis of the business and the unique opportunity it represents, combined with marketing flair and an understanding of what buyers are looking for
Sometimes different versions of the IM for different buyer types
Occasionally information memoranda are not used (in expedited processes where times is of the essence), but other bespoke marketing approaches are used
Tailored emails to suit different types of buyers
"Teaser" documents also often used pre-NDA
Information presented in the way buyers (and their investors) need to see it
5. Accounting & Finance Support
Brokers
Brokers will:
Provide basic advice on add-backs, recasting, adjusted net profit (SDE) calculations
Calculate some automated metrics via standardised models
M&A Advisory Firms
M&A advisory firms will:
Have chartered accountants on staff
Conduct detailed financial analysis
Perform true optimisation of the accounts (this involves much more than just add-backs)
Work closely with your accountant to do whatever is necessary to get the financials ready - sometimes involving complete restructuring and recreation of the accounts
Have the ability to spot errors in the buyer's analysis (or their due diligence teams), challenge them on it and defend the client's interests
This is another area where there is some variance between brokers – some do have chartered accountants on staff and provide additional support compared to the standard broker model – but the simple nature of their business (taking on so many clients at a time) dictates the fact that they cannot devote as much attention to each client as advisory firms do.
6. Problem Solving
Brokers
Brokers have:
Little capacity to handle anything that falls outside of the usual scope
Little capacity to even identify issues that might be problematic at a later stage, early enough to fix them
M&A Advisory Firms
M&A advisory firms:
Take a completely bespoke approach with every client
Thorough preparation enables issues to be identified early and solutions found
Help the client resolve the problem and find the right time to go to market
With issues that can't be resolved, their impact on the process is weighed and decisions are taken. In discussions with buyers, these are framed in the right way to minimise their impact
7. Advisory Team & Advisory Capability
Brokers
Brokers:
Advisory is not the main focus of these firms - simply finding buyers is
Try to use their website/marketplace + their "list" to find buyers as efficiently as possible, which is what they believe is the main objective
Limited amount of support compared to advisory firms
Deal advisor usually quite junior (if there is one at all)
M&A Advisory Firms
These firms:
Advisory is the main focus: i.e. finding the right buyers + everything involved in getting the best deal, carefully protecting the client's interests, providing support and actually closing the deal
Experienced dealmakers
Chartered accountants, MBAs, investment bankers
Likely to have "seen it before" with many issues that arise
Have real gravitas with buyers, respected
Able to advise and strategise throughout the deal, including explaining why the buyer is acting a certain way, interpreting communications (or silences), advising how to respond; knowing where the limits are, pushing negotiations to the point of getting the buyer's best deal, but not to the point of losing them
Detailed market knowledge adds important context in a variety of ways throughout the process, from current deal multiples and deal terms, to economic and industry conditions that can affect timing considerations
Able to coach the client where required (eg: to improve performance on buyer calls)
Strong financial acumen - very important in maximising valuation and negotiating with professional due diligence teams on the other side
8. Strategy
Brokers
Brokers’ approach to strategy:
Sell-side M&A strategy is not a focus for high volume brokers – they have to run so many processes for so many clients simultaneously that everything has to fit into a template, to be efficient
Very often not even a consideration at all
M&A Advisory Firms
For these firms:
M&A strategy is their bread & butter
Carefully thought out approach
Starting right from the preparation of the business, consideration is given to how to frame each issue in the right way; how to find the right buyers and bring them into the process at the right time; how to strengthen the client’s negotiating position
Since closing the deal (not merely receiving offers) is the actual objective, strategic firms focus on:
Making preparations to prevent retrading
Helping the client to choose which buyer to proceed with, based on data and expectations around how they will act in due diligence
Advising on risk (not merely price)
Providing extensive support through due diligence
Negotiation (see below)
9. Negotiation
Brokers
Brokers’ approach to negotiation:
Highly variable
Often no more than a process of going back and forth at LOI stage with competing bidders and seeing which one is the highest, pushing them a little, and making a decision
M&A Advisory Firms
For M&A advisory firms:
Negotiation is a key focus and a central part of the strategy discussed above
It is a multi-faceted process that involves preparation well before actual discussions
Have experienced dealmakers with the ability to truly find the buyer's best offer
More importantly: to close the deal at the offer price
Knowledge of what is "market" and what isn't, in a given context
Seeing issues ahead of time and being prepared for their impact on negotiations
Ongoing process that is interconnected with the work of the lawyers, enabling risk allocation and commercial terms (price) to be negotiated simultaneously; providing negotiation support to strengthen the hand of the legal team and prevent commercial points slipping (which can happen without M&A advisory support through due diligence)
10. Time
Brokers
Brokers do not have the time, or even enough people with seniority, to devote a lot of time to each client. With brokers you can expect to:
Handle buyer calls on your own (or with a junior staff member from the brokerage firm)
Handle all of the calls and communication in due diligence largely on your own
Feel a little disconnected from the senior people at the firm, since you’ll hardly speak to them
M&A Advisory Firms
M&A advisors take over the process. You will get a lot of the advisors’ time. With these firms you can expect to:
Feel like you are closely supported by a team of senior advisors who really understands your business and has your interests at heart
Have senior people from the advisory firm (often more than one) with you on all buyer calls
Have senior people from the advisory firm (often more than one) with you on almost all due diligence calls
In addition they will:
Join (or lead) strategy calls with your legal team
Act as a true intermediary between you and the buyer, where the buyer is able to communicate things to you through the advisor, rather than directly to you – this can allow the buyer to be more frank, and can remove emotion, especially around contentious issues, enabling better progress
This is clearly very time-consuming for the advisory firm, but it results in far better outcomes for their clients.
A Note About “Introducers”
Sadly, these are very common in the e-commerce world. They might be your accountant, your PPC agency or just some guy who approaches you. They want to introduce you to buyers in order to get a referral fee. Sometimes they tell you about the fee they are getting, sometimes they don’t.
Because this can be lucrative, some of them are highly focused on it and put a lot of effort into contacting their clients and offering to introduce you to acquirers.
This adds no value.
It's easy to find buyers on your own. Letting someone refer you to their preferred buyer/s does nothing to help you sell your business for the best price and terms. It does nothing to help you actually close the deal. It does nothing to protect your interests. And obviously these people provide no support.
Furthermore, their financial interest is in helping the buyer in this transaction, not you.
Another “Introducer”: The Buy-Side Marketplace
There is another tier of introducer called a "buy-side marketplace". This is simply a website set up to attract you to it with the promise of running a competitive process for you, but for "no fee". The truth is they do get paid: by the buyer.
Some of these websites are quite sophisticated, with attractive web design. Others have seemingly helpful blog posts and a lot of content. All of this is designed to draw you in.
They do perform the basics of one part of the sale process (introducing you to many buyers simultaneously and trying to get the best offers). Because of this, some of these introducers actually represent themselves as “brokers”, which is very misleading.
In reality, even this early stage of the process is not run properly: it is not exhaustive, it does not involve full preparation, nor does it involve identification and inclusion of key strategic buyers, for example. And they certainly do not provide the strategic advice and support that you need throughout the rest of the process.
The least problematic buy-side marketplaces are the ones that charge buyers a subscription fee rather than a commission. With this model the incentives of the marketplace are not as strongly against the seller’s interests.
However, for the marketplaces that charge buyers a commission fee on successful closing, the model is fundamentally flawed because the website is working for the buyer, not you.
In addition, these sites provide less support than brokers do (and far less than advisory firms). They are just "Introducers", but with nicer websites.
In summary, these websites add nothing in terms of actual deal value or likelihood of closing, and since they work for the other side, can arguably have a negative impact, from the seller’s point of view.
An Exception
The only introducers who add value are the ones who will introduce you to serious M&A advisors, not for the referral fee (which is markedly lower than if they referred you to buyers*), but because they know this will achieve the best outcome for you.
Someone who genuinely has your interests at heart and understands the basics of sell-side M&A knows that to get the best result and to protect your interests you need a strong M&A advisory firm on your side. Introducing you to one or several of these firms is actually helpful. While the introducer is not providing any support at all, at least they are referring you to the best solution.
And while they are sometimes getting a fee for this, at least they are not being paid by the other side, so their interests are aligned with yours.
* Referral fee math:
Referring directly to a buyer: the referrer is typically paid 2.0% of total deal value.
Referring to an advisor: typically 10% of the advisor's fee, which might be say 5% (in Hahnbeck's case). So the referrer receives 0.5% of total deal value.
Referring to a broker: typically 10% of the broker’s fee, which would be in the region of 8-9% (8.6% using the fee structure in the next section). So the referrer receives 0.86% of total deal value.
The likelihood of closing with an advisor is higher than the other options, so this helps. But in terms of monetary reward, by referring to an advisor, they are personally losing out. They are doing it because it will get you the best result.
How Much Do They Charge?
Thinking back to the four ways to sell your business from the top of this article, the first two options involve no fees. Simply working with buyers on your own, or being introduced to buyers by an “introducer” (such as a buy-side marketplace) means that you do not pay a fee.
This makes sense. There is no added value (sometimes negative) so no fee should be payable by the seller. From the buyer’s point of view this situation (finding a seller that has no M&A support) is vastly superior, so it’s fair that the buyer pays a fee.
Selling without M&A advisory support means getting a worse deal, while doing much more of the work yourself. Professionals don’t do this – they always use advisors. The cost of the advisor is substantially outweighed by the deal they achieve, not to mention the support.
So of the two remaining options, how much does each charge?
Business Broker Fees
One of the anomalies in M&A is that brokers and marketplaces actually charge more than M&A advisory firms.
Brokers typically charge completion fees (AKA “success fees” or “commission fees”) structured along a sliding scale, inspired by the Lehman formula, except starting at a higher level. Where the Lehman formula would start at 5% and the more popular Double Lehman at 10%, in the e-commerce sector, brokers typically start at 15% of the deal value for the first $1m.
With each of these fee structures, as the deal size increases, the incremental commission decreases. This means that different commission rates are charged on different portions of the total deal. For example: 15% on the first $million, 12% on the next $million, 10% on the next $million, 7.5% on the next $million, 5% on the next $million and 2% on everything above $5million. Each broker and marketplace will have their own variation of this.
In the example above this would mean that for a $6m deal the commission fee would be $515k or 8.58%.
M&A Advisor Fees
M&A Advisors typically use either the double Lehman formula discussed above (fees starting at 10% for the first $million and descending from there), or a variation of it, or a flat fee model. For example, Hahnbeck charges a flat 5% fee.
M&A advisors also charge small up-front or retainer fees which are usually in the low single digit thousands per month. These fees are deducted from the commission when the deal closes. So these up-front or retainer fees are not on top of the commission fee, they are deducted from it.
In the case of a $6m deal the commission would be $320k with a classical double Lehman formula (5.33%) or $300k with a flat fee like Hahnbeck’s (5.00%).
M&A advisors sometimes charge slightly lower fees for businesses that are susbtantially larger than this, on a case-by-case basis. Brokers rarely close deals larger than this size.
Compared to selling without M&A advisory support, where deal values are often quoted as being 25% lower than the equivalent deals with M&A advisory support, fees in the region of 5-6% are, relatively speaking, very reasonable.
Why Do Brokers Charge More Than M&A Advisors?
In the e-commerce sector, the commission structure of sell-side brokerages and marketplaces is such that they actually charge more than M&A advisors, despite offering only a relatively basic service. How is this possible?
Firstly, advisory firms are understandably much more selective than brokers. Their work is highly intensive so they can only work with a select few clients at a time. Almost their entire fee is “contingent” (meaning they only get paid once the deal closes). The advisory firm has to have a lot of confidence that the client’s business is saleable and that after months of work, the deal will close. Therefore they say have to “no” to most of the sellers who approach them. With advisors saying “no” to most people, brokers are able to take on these clients and charge higher fees, because the service they provide is still substantially better than selling on one’s own, and still outweighs the cost of the fees.
Secondly, it can be argued that brokers have to charge a higher commission rate because they focus on smaller deals. And even though they are set up to be efficient, enabling them to run sale processes for a great many clients at the same time, most of these businesses do not sell. This is the nature of M&A at the smaller end of the market: these brokerages have to take on many clients, because the vast majority of them will not sell. The few that do close pay for all of the others. This is the case across M&A generally, not only in e-commerce or with digital-first businesses.
This is not to say that the brokers are not adding value: they are. They take a portion of the work off the seller’s shoulders and they provide (some) support. Their service is usually worth the cost. It’s just that the comprehensive service provided by M&A advisory firms is obviously a better deal.
Who Should Use An M&A Advisory Firm?
Good M&A advisory firms provide the highest level of service and get the best results, while helping their clients to be better-informed throughout the process, with fewer surprises, better options and an overall superior experience. So everyone should use an M&A advisory firm right?
No. Some businesses are actually better suited to brokers / marketplaces (see below).
The businesses that are best suited to working with M&A advisory firms tend to be larger ($1m EBITDA and above*) and highly saleable. This is because the intensive approach of an investment bank adds more value to a competitive process than an uncompetitive one. Very small businesses, by their nature, are less attractive to the well-funded corporate buyers who can pay the most. Extracting the best deal from these buyers is where M&A advisory firms shine. Adding hundreds of thousands to millions of dollars in deal value, while protecting the client’s interests, spotting risks early and helping the deal to actually close, is the core work of the M&A advisory firm. Smaller and less-competitive deals are not as suited to this kind of work.
(* Hahnbeck sets its minimum at $500k EBITDA for e-commerce clients because we know that we can still add value in this range. Our largest clients have >$15m EBITDA. For SAAS businesses the metrics are entirely different – while profit is important, recurring revenue, churn and growth metrics are more important.)
Adding hundreds of thousands to millions of dollars in deal value, while protecting the client’s interests, spotting risks early and helping the deal to actually close, is the core work of the M&A advisory firm.
Who Should Use A Broker?
Brokers and marketplaces that represent sellers are particularly suited to businesses where the potential buyer might be an individual.
This applies to all businesses where corporations (such as aggregators, large strategics and PE firms) are less likely to be interested – mostly due to the small size of the business, the business model (eg: dropshippers, small wholesalers) or other elements that don’t fit with their typical acquisition criteria. In these cases, it is important to include individual buyers in the process.
Brokers / marketplaces usually have a long “list” of buyers, tens of thousands of people long, who they email their “listings” out to. The majority of the buyers on these lists are individuals, whether or not they have set themselves up with a LLC and added the word “Capital” at the end of their business name. They are individual buyers, usually using their own money or that of close friends and family, to buy a business. They will often use an SBA 7(a) loan to fund part of the deal (for US buyers), or other capital sources such as Boopos. Some of these buyers are serial entrepreneurs, some are building a portfolio similar to a tiny aggregator, while for many others it is their first acquisition.
While M&A advisory firms also work with some of these people, the individuals they work with tend to be very well-funded and interested in larger acquisitions. To reach a lot of individuals who are interested in smaller acquisitions (<$1m deal value), the best method is to use a reputable broker or marketplace that simply has a lot of these people on their “list”.
Variance
Note that within the “broker” group there is significant variation in their approach. For some, the whole point really is simply to introduce the client to buyers. In the e-commerce sector, where many of the the main acquirers are well-known and easy to find (eg: using this list of Amazon aggregators) there is no value in this. It is equivalent to handling the process on your own.
Others brokers provide the support outlined in the 10 points above, mostly using automated tools and templates via their website to make the process efficient, but nonetheless providing some meaningful benefit. Some brokers even provide a little advisory or accounting support. While this is nothing compared to the level of support provided by M&A advisory firms (investment banks), it still adds value.
Conclusion
Not everyone wants to use either a broker or an M&A advisory firm (investment bank). Some people simply prefer to handle things on their own, despite the fact that this will result in a lower likelihood of the deal closing and the fact that the deal value and terms are likely to be substantially worse.
Working with an “introducer” or a marketplace that is paid by the buyer is equivalent to selling on one’s own and is substantially inferior to working with a broker or sell-side marketplace. All of these options are inferior to working with an M&A advisory firm, which is the gold standard.
However, M&A advisory firms are best suited to working with larger clients and helping those clients to strategically navigate their options to get the absolute best deal, while protecting their interests. These businesses can benefit from all of the advantages that M&A advisory firms offer.
Smaller businesses (or those where the sale process is expected to be less competitive), for example those with <$500k EBITDA, are often not within the range that M&A advisory firms will work with, so they should use reputable sell-side brokers to go to market.
Hahnbeck is a leading M&A advisory firm, known for our strategic approach to each engagement, our fierce protection of our clients’ interests and our outstanding results. To get started with Hahnbeck just send an email to info@hahnbeck.com or use the button below.