Contacting a business broker is a routine part of acquisitions. Most businesses that put themselves up for sale enlist a broker, and any savvy acquisition entrepreneur needs to know how to work with these professionals.
Brokers can be an invaluable asset, but if you don’t understand how they operate, you’re starting off on the back foot. I’m here to advise you on:
- What a broker does
- The difference between brokers and advisors
- What you need to know before reaching out
- The advantages & costs of working with a broker
Here’s the deal.
Business Brokers vs. M&A Advisors
What’s the difference between a business broker and an M&A advisor? Let’s start with what they have in common.
- Both professions help buyers and sellers negotiate the acquisition process and achieve a satisfactory outcome.
- They each earn money through commission on successful deals, plus (usually monthly) retainer fees.
- Any good broker or advisor will have a proven track record of facilitating successful acquisitions.
So why are they considered separate roles?
The most frequently cited difference between business brokers and M&A advisors is that business brokers tend to facilitate single-business acquisitions with a value under $10m. This isn’t a strict difference – a broker can choose to advertise their services as an M&A advisor regardless of deal size.
Brokers that work with smaller businesses are more proactive in publicly listing the companies they’re working with. A company will approach a broker when it wants to sell up, and then it’s the broker’s job to find a good buyer.
Good business brokers tend to be pretty hard-headed. Given the size of the businesses they’re working with, they know to expect any number of offers from inexperienced acquisition entrepreneurs who wouldn’t be the best fit for their clients.
As a broker’s reputation depends on having a strong track record of putting successful mergers and acquisitions together, they give short shrift to unrealistic approaches.
This is why contacting a broker should never be your first step when you’re looking to acquire a business – do your research and prepare an ironclad case first. You need a solid value proposition from day zero.
For the purpose of this guide, we’ll define an M&A advisor as an experienced broker who puts together complex mergers and acquisitions with a value of over $10m.
So, really, an M&A advisor is a specialist kind of broker. If someone doesn’t have a good track record of putting together smaller deals, why would you trust them with much larger and more complicated acquisitions?
While business brokers usually work with single-business sales, M&A advisors often put together more complex deals involving several businesses or requiring bespoke valuation methods.
One of the most famous examples is the hostile 1999 Vodafone-Mannesman merger, which required an incredible amount of work from M&A professionals (and still wasn’t a great deal!) Speaking of which, you’re also far more likely to need an M&A advisor if you’re making an international acquisition.
M&A advisors are less inclined to list their clients publicly. They’ll have an extensive contact list to work with when they’re helping a seller find a suitable acquiring company, and most interactions take place behind closed doors.
We’re primarily concerned with smaller-scale transactions, so this guide will assume you’re approaching a regular business broker. The point is that you shouldn’t let fancy titles put you off making an approach!
Who Does a Business Broker Represent?
Brokers work with sellers before buyers. They don’t usually headhunt businesses that aren’t already for sale; rather, a company approaches a broker to help it find a good buyer.
The Broker and the Seller
Why do you need a business broker to help sell your business? Mostly because it vastly reduces the cost and effort involved in finding a good buyer. While sellers should always investigate any potential buyers themselves, the broker can conduct most of the due diligence checks and ensure that the buyer is realistic.
The seller understands that the broker will charge a commission for a successful sale. Especially for smaller transactions, this fee is often outweighed by the savings the seller makes in handing over the selling process.
The Broker and the Buyer
Acquisition entrepreneurs typically approach brokers because they’ve seen a listing for a company they’re interested in buying.
Experienced entrepreneurs and brokers tend to form lasting relationships. It’s advantageous for the broker to keep in touch with clients who have a strong track record in successful acquisitions – it makes it easier to find a good buyer and put together a deal.
Meanwhile, it’s beneficial for the entrepreneur to maintain a good relationship with the broker because they may be given first refusal on new, relevant listings. It also means that the buyer doesn’t have to repeatedly prove their credentials – while due diligence checks will always be conducted, establishing a trusting working relationship is extremely helpful.
What Do You Gain By Working with a Business Broker?
So why should you pay to work with a business broker rather than seek out a business yourself? Here’s the lowdown.
- It makes it easier to find a good target company. Identifying and approaching target businesses that haven’t already expressed an interest in selling is a lot of work. You won’t have anywhere near as much readily available information as you would by checking out companies listed with a broker.
- Due diligence and legal compliance are much simpler. A reputable broker does much more than put interested parties in touch. They’ll draw up paperwork like the LOI, assist with legal checks, and help the buyer perform comprehensive due diligence.
- You may avoid a poisoned chalice or an inappropriate acquisition. A broker’s job is to put deals together – but the best brokers understand that if their deals repeatedly lead to companies failing, it reflects poorly on them. While you may not want to be told that a company you want to acquire is a poor fit for your needs, a reputable broker will let you know if it’s not a good decision early on.
- Good brokers are long-term assets. As an acquisition entrepreneur, you’re constantly looking for the perfect opportunity. But you’re busy. You don’t have time. A broker does, and if you have a strong relationship from past transactions, they’ll let you know when good opportunities arise.
How Much Does a Business Broker Cost?
Like all things in life, a broker’s services come with a cost. For the buyer, this is usually a monthly retainer fee – the majority of the broker’s money comes from commission (paid by the seller) pending a successful sale.
There’s no set price for a broker’s services. Especially with smaller transactions in the 6-figure range, commission rates may be as high as 10-12%. For larger acquisitions, many brokers use the Lehman Formula, which stipulates that the broker receives:
- 5% up to the first $1m
- 4% up to the second $1m
- 3% up to the third $1m
- 2% up to the fourth $1m
- 1% of all higher fees
While the seller incurs a higher proportion of the costs, it’s well worth shopping around to find a broker with reasonable retainer rates and success fees.
If a selling company is handing over a large sum to a broker in commission, it may also be keener to fight for a higher valuation. Likewise, a disreputable broker might list a business at an inflated price to achieve higher fees (this isn’t common and usually gets caught pretty quickly, but it’s worth watching out for).
Finding the Right Broker
If you’re starting up as an acquisition entrepreneur, I’d highly recommend building a strong relationship with a good broker. Here’s a quick buyer’s guide based on what I look for.
Choose a Specialist
Some brokers are generalists, but others tend to work with companies in specific industries. I tend to prefer these because regardless of how good a broker is at putting together deals, you’re more likely to get accurate, in-depth due diligence and legal advice from a broker who knows an industry inside out.
If your acquisitions tend to be in a certain industry (e.g., plumbing, SaaS), you’ll also likely hear about more relevant opportunities through a specialist broker.
Check Their Track Record
A good broker doesn’t just make deals happen – they ensure that deals will actually benefit both parties.
While the broker can’t be directly blamed for companies failing post-acquisition, if you notice a trend of their acquisitions turning out badly, that’s a red flag. It means that they probably haven’t helped the buyer appraise the target business effectively and may have neglected important details – legal, financial, or otherwise.
Trust Personal Service
Another advantage of working with specialist brokers is that you’re more likely to get personal service.
I value this so highly when I work with brokers. If I’m treated as just another client on a list, I don’t feel confident that my interests are being served. If I’m talking to the same person who is personally managing my acquisition every time I call, that feels much better.
It also gives me a trusted future point of contact. Building a professional network is essential for an acquisition entrepreneur, and your broker should 100% be a part of that.
Expect Hard Questions
Remember that the broker is working for the seller. They’re the ones paying the big bucks – not you.
You need to be ready to defend your acquisition strategy and present a solid case for yourself before you approach a broker. If they view you as an unrealistic prospect, you’ll be laughed off the call – and that will sour your future relationship.
Be prepared to answer hard questions. Show that you’ve already done as much research into the target company as possible. This gives you the best chance of a strong working relationship and a successful acquisition.
You’re going to have to work with business brokers in your journey as an acquisition entrepreneur. So it’s worth doing right.
Let me give you a hand.
ETAInsider is an invaluable resource for M&A professionals looking to find attractive target businesses, structure deals, and manage companies successfully from acquisition to exit.