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What Is The Difference Between An M&A Advisor And A Business Broker?
ENLIGN DEAL TEAM | 12/24/2022
To answer that question perhaps it’s best to first answer the question what is the difference between M&A transactions and business broker transactions and while the answer to that is simple, it’s not very clear. That is because the definition of M&A transactions and business broker transactions is subjective. Admitting that there is no hard and fast rule there are two generally accepted views of what makes these types of transactions different from one another and both can be further defined into subcategories. Middle market transactions typically have an enterprise value (worth) of $50,000,000 and higher. Lower middle market transactions are typically between $1,000,000 and $50,000,000 while main-street business brokerage transactions typically fall below $1,000,000 of enterprise value. Defined by Buyer Type Buyers of businesses fall into two basic categories that I will label as “professional” and “owner operators”. A professional buyer, or what I like to call “professional money” is seeking a business that they are not going to run, but hold in a portfolio of businesses as a platform (primary basis for organic and strategic growth) or as an add-on or bolt-on (usually smaller companies that augment the platforms operations by either adding scale, geographic coverage, vertical integration, horizontal integration, or additional complimentary projects and services). These buyers evaluate businesses for acquisition based on their EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization. Buyers of main-street businesses are planning to step into the role of the seller and operate the business.
Some people call this “buying a job” which is somewhat insulting as owning and operating a business entails a lot more experience and dedication than most “jobs”. Businesses of this size are commonly valued based on a multiple of SDE or Seller Discretionary Earnings a.k.a. SDCF or Seller Discretionary Cash Flow. It is worth noting that because a lower middle market or middle market buyer is going to have to pay an executive compensation and benefits the multiple used for EBITDA transactions is higher than main-street transactions. Depending upon the size of the business, it’s industry, geography and barriers to entry and prevailing macro economic conditions EBITDA multiples usually fall between 4x and 6x.
Of course there are always outliers. Main-street transactions are even more sensitive to the aforementioned factors and see SDE/SDCF multiples between 2x and 3x. Solo-preneur businesses ( a business with only one employee) are so sensitive to external factors that they are often unsellable. Defined by Size Middle market transactions typically have an enterprise value (worth) of $50,000,000 and higher. Lower middle market transactions are typically between $1,000,000 and $50,000,000 while main-street business brokerage transactions typically fall below $1,000,000 of enterprise value. The lines are admittedly blurry and not everyone agrees. So, now that we’ve defined the difference between an M&A transaction and a main-street transaction what is the difference between an M&A advisor and a business broker? Again, it is subjective, but most individuals who define themselves as business intermediaries (M&A advisors and/or business brokers) would agree that the primary difference is the enterprise value of the businesses they work with most often. An M&A advisor would be defined as someone who regularly works with clients with over $1,000,000 of enterprise value. Similarly a business intermediary who typically works with businesses with an enterprise value under $1,000,000 would be a business broker. Can one person be an M&A advisor and a business broker? The answer here is definitively “Yes”. As an example I started my business brokerage career 20 years ago only selling businesses worth less than $1,000,000. About 5 years in I had my first transaction over $1,000,000 and began my path to M&A now having listings as large as $40,000,000. That being said, I still work with business owners under $1,000,000 if they are referred by another trusted advisor and in those situations I do not charge a listing fee. In Summary M&A advisors work on larger transactions with buyers who typically do not intend on working for the business and are growing a portfolio of complimentary businesses. Business brokers work with smaller businesses and occasionally solo-preneurs in unique situations to find buyers that intend on stepping into the role of the seller as an owner operator. Many M&A advisors started their career as business brokers and transitioned into M&A – some leaving main-street transactions behind while others work with a large range of business sellers from solo-preneurs approaching the middle market.
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