Which to use — investment banker or business broker? They both find buyers for sellers. But the differences are important. Which one is right for you depends on your company’s size, deal complexity, and geography.
In general, investment banks (IBs) do deals featuring companies with at least $10 million in revenue while brokers work with smaller companies, sometimes with sales less than $100 thousand. (Everything we’ll say here about brokers and IBs is a generalization.)
IBs also court B2B clients addressing national and international markets while brokers tend to concentrate on local B2C businesses.
Complexity Matters Too
In addition to serving bigger companies in the same industries that brokers serve, IBs attract clients in specialized knowledge industries where brokers rarely tread. Examples: biotech, pharma, big agriculture, aerospace, telecom, etc.
Another form of complexity is in the structure of the deal itself. Examples: buyer needs to obtain third-party financing; two private companies wish to merge in a cashless transaction; seller intends to float a secondary public offering; seller intends to convert to an ESOP.
Finally, IBs advise their clients not only on M&A projects but on a variety of other types of engagements related to financial performance as well (see footnote in chart below). In contrast, most brokers focus solely on M&A and few of them undertake buyside M&A engagements while most IBs will.
All This Affects Compensation
IBs’ complex, bigger and sometimes very specialized types of transactions take longer to close and during that time require back-office support from research staff and pricey proprietary databases.
To cover these costs IBs are paid a retainer to help defray their expenses during the extended period before they earn a success fee. Even more important, they seek assurance that their client has “skin in the game” and is as committed to closing the deal as they must be.
Retainer payments may take the form of a flat upfront fee, a monthly fee, or sometimes fees earned based on milestones achieved. (For examples of milestones, see WHAT SELLSIDE INVESTMENT BANKERS DO.)
In contrast, brokers typically live and die by the sword of success alone. They do so because they can — they often juggle multiple clients simultaneously and their sellside transactions typically close much faster. That means the gaps between their paydays are relatively short. They’re compensated like realtors but at higher percentage rates.
For a quantitative sense of the fees charged by IBs on mid-market sellside deals see this Divestopedia article. It’s a few years old but still stands up. For details on sellside brokers’ fees see this BizBuySell piece.
How do investment bankers compare to business brokers? While they share some similar activities, they serve quite different market segments. An analogy might be the difference between a chiropractor and surgeon. Which to use when selling a business depends entirely on your circumstances.