An Intermediary to Lead the Process: Investment Banker or Business Broker?

Whether you are a first-time seller or a whiz at mergers and acquisitions (M&A), it may be wise to retain a financial intermediary as a “tour guide” to help you through the process. But who do you choose? An investment banker or a business broker?

What Does a Financial Intermediary Do, and Why?

The proper role of a financial intermediary is to connect two parties who have yet to realize that they need each other and to help craft a better deal than those parties could have made on their own.

If financial markets were textbook perfect, you wouldn’t need help figuring out what your business is worth or finding the optimal buyer. Unfortunately, real markets do not act like your college Econ 101 models. Sellers struggle to find the right buyers, and buyers struggle to find the right price. You’ll find that nobody has perfect information or foolproof judgment.

An Intermediary’s Role in a Business Sale

If you want to sell your business, you have to start by figuring out how to sell it and to whom. Any business sale involves a lot of uncertainty and risk.

If you are an inexperienced seller, rather than fly blind or try to learn how to sell your business on the fly, hiring a mergers and acquisitions (M&A) intermediary allows you to get a proper valuation of tangible and intangible assets and let an expert manage the sale.

What is an M&A Intermediary?

Intermediary is a broad term for anyone who facilitates economic activity. They appear when a market becomes too big or complex for individual actors to navigate confidently.

For example, retail bankers intermediate between savers and borrowers who likely have never met. Some intermediaries even coordinate across time. For example, a pension fund intermediary might work to clarify a worker’s wages and what their compensation might be down the line.

Few markets are as ripe for intermediaries as mergers and acquisitions. For nearly a decade, average deal values have totaled at least $3 billion annually, according to a report issued by Bain & Company in early 2024. Even after the ups and downs in 2021 and 2022 related to the pandemic and the Fed’s interest rate hikes, M&A activity jumped 41% in the last quarter of 2023, making many optimistic about the coming year, according to McKinsey.

A great deal of information and negotiation is required to move trillions of dollars of financial capital, and most business owners lack the time or expertise to do so. Thus, intermediaries play a significant role in this process.

Comparing Investment Bankers and Business Brokers

It’s essential to understand your options when using an intermediary to facilitate your sale. There are two major types of M&A intermediaries: investment bankers and business brokers.

Business Broker Basics

Business brokers tend to handle smaller M&A transactions, such as smaller family-owned companies or single-entity partnerships. In the United States, a maximum threshold of $5 million in enterprise value is often cited for business brokers. In fact, some estimates suggest that business brokers handle 80 percent of M&A deal volume but less than 5% of total deal value.

Just like a real estate broker for your home, a business broker lists your company for sale and advertises to prospective buyers on your behalf. The seller and broker discuss an asking price beforehand, but the broker handles outreach and initial negotiations afterward.

Working With a Business Broker

Let’s say, for instance, you hire a business broker to list your company. You agree the company is worth $800,000. A prospective buyer makes an inquiry; your broker determines the offer is serious enough to warrant further action.

Thanks to the broker, the buyer executes a confidentiality agreement, sometimes called a non-disclosure agreement (NDA). This agreement protects sensitive information and prevents competitors or employees from hearing about the deal before completion.

The prospective buyer signs the NDA. You and your broker show him the business’s books, and he is interested enough to make a purchase offer. After some negotiation, you settle on terms, and the buyer finds a way to finance a $725,000 deal. The broker charges a 10% “success fee” (commission), or $72,500.

While 10% may be high,  some brokers may charge 12%. As transitions become larger, rates may decrease, but 10% is typical.

Investment Banker Essentials

Investment bankers are often active in middle-market transactions (deals between $50 million and $500 million) and upper-market transactions ($501+ million). The largest investment banks will only take multi-billion dollar deals. Lower-middle market bankers may set a minimum threshold of around $500,000 in recurring EBITDA.

Many investment bankers deal in securities. These bankers need securities licenses issued by the SEC, are monitored by FINRA, and work under strict state and federal supervision.

Unlike business brokers, investment bankers rarely act like a real estate broker. Whereas a business broker focuses on simple marketing and one-off negotiations, an investment banker commonly works to create a controlled auction among several large buyers simultaneously.

Working With an Investment Banker

An investment bank’s M&A department agrees to help sell your business (their service is referred to you as “target representation” or “sell-side work”). Most bankers prefer to work with sellers because many sell-side projects become completed transactions.

As part of their advisory process, the bankers create different valuation models. The idea is to create a range of possible valuations, each based on different buyer scenarios, before the auction begins. They determine that your business is potentially worth $45 million—$55 million to the right buyer.

The investment bankers communicate with possible buyers, often initiating contact. They hope to create an auction between multiple prospective buyers. Finding the right buyer for your business is key. After an NDA is in place, investment bankers will use a detailed “selling memorandum” for marketing material.

You have a very interested buyer, but financing is a concern. The investment bank diligently works to determine an appropriate purchase price and helps raise capital.

The investment bank already charged you a non-refundable $70,000 monthly retainer. After the completed deal, the bank charges a “Double Lehman” success fee with this structure:

• 10% on the first $1 million
• 8% on the second
• 6% on the third
• 4% on the fourth
• 2% for every $1 million afterward

Investment banking fees and services are fairly diverse. The Double Lehman structure is common but certainly not universal.

Do You Need an M&A Intermediary?

Most people who try to sell their business have never done so before, and the process can be overwhelming for the underprepared. Assemble a transition team of trusted experts to increase the odds of a strong, timely sale.

A good M&A intermediary can save you considerable time and, ultimately, help maximize your sales. Of course, no industry is without charlatans of one form or another — you must carefully scrutinize any investment banker or business broker before signing up for any expensive service.

On the other hand, you may already be well-connected and highly knowledgeable about financial markets. You may have enough time (or have advisors with time) to perform due diligence, marketing, and negotiations without an intermediary. If that is the case, go forth and conquer!

Business Broker or Investment Banker?

The size of your company will tell you which service you should use. If your business is valued at less than $5 million or $10 million or has less than $500,000 – $2 million in EBITDA, finding a willing investment banker may be challenging. However, large company acquisitions typically require financing knowledge and licenses that many business brokers do not possess.

Factor in the kinds of acquirers who are most likely to be interested. Business brokers tend to work with individuals or small groups, while investment bankers frequently work with large corporations or extremely wealthy individual investors.

Remember to find a specialist who understands your industry and your business model. The rise of boutique M&A firms in recent years has made this search easier.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

• Negotiating An M&A Deal
• The M&A Process
• Structuring and Planning the M&A Transaction
• This is an updated version of an article originally published on June 7, 2016, and recently republished on June 22, 2020.]

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