The first post in this blog series explained the different types of possible capital structures for M&A transactions. Once you’ve considered those options, the next question to ask is: “Who should you hire to facilitate and market the transaction?”
As a business owner, you know that when your company has reached a critical juncture, it’s necessary to either raise growth capital, bring on a partner, or sell some or all of the business. But who should you look to for guidance on the alternatives and respective pros and cons? Be wary of taking unsolicited “advice” from anyone who wants to offer you a deal to bring in capital, and potentially take on additional equity, in exchange for being your advisor. You need a professional firm that knows what they are doing, has a team able to execute your plan, and is trained and licensed to deliver what you need.
There are three primary categories of professionals/firms available to assist in M&A scenarios: 1) business brokers and “finders,” 2) large “bulge bracket” or “wirehouse” investment banks and 3) boutique middle-market investment banks. Each offers different capabilities, services, specializations and limitations. Which option is best for you can depend on many factors, including preferred capital structure, cost, experience and breadth of services offered, among other considerations.
Looking at licensure
All the capital structures detailed in the first post of this series require licensure, except for asset sales, which represent a type of majority sale. Business brokers can source a buyer or group of buyers who upon completion of the transaction control and actively operate the company or the business. Business brokers cannot work with passive investors. So, If you’re only looking to sell assets, a business broker can potentially help facilitate that transaction but may be limited on the type of buyer they can work with. However, if you decide during the process that you’d rather pursue a different type of M&A activity, the business broker would not be able to continue advising you. Instead, you would need to find another professional with the appropriate licensure.
Business brokers are non-licensed individuals and firms that offer to help sell your business for a fee. They’ll happily work hard for you within the constraints of their role, but you should know that those limitations are meaningful.
Since business brokers aren’t licensed with FINRA as registered broker-dealers, they can’t legally market securities on your behalf or raise growth capital for your business. They may be able to find you a possible owner-operator, but outside of those specific circumstances, business brokers may operate in a gray area that could expose them, and you, to regulatory risk. They typically don’t carry E&O (errors & omissions) insurance which all FINRA members are required to do, which could increase risk as well.
FINRA-licensed investment firms and bankers can help with debt and equity offerings (private placement or public offering), M&A, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations, and business combination transactions and advise you on which might be best for your business goals. Thus, such firms and professionals can easily switch gears if your objectives change.
When you hire a licensed boutique investment bank, you typically get a sophisticated team of experienced professionals who can expertly advise you on the ins and outs of your particular situation. They are typically incentivized by their legal mandate and fee structure to find the right solution for your business.
Another benefit of working with a licensed investment banker is that you can perform a broker check on the FINRA website to determine if that professional has ever had any financial issues or been the subject of complaints. This offers great transparency and accompanying peace of mind.
Prioritization and fees
Many of the big-name investment banks have great reputations for handling large transactions (typically involving companies with over $1 billion in revenue) and may represent the best options for a big business. However, if your business is in the lower to middle market ($5 million to $500 million in revenue), you might not be a high priority to such an investment bank and its fees could easily stretch beyond your budget, as most have a minimum fee.
In general, you will also find that, somewhat surprisingly, boutique licensed investment banks typically offer lower fees than unlicensed business brokers. This is partly because unlicensed brokers aren’t subject to oversight by FINRA regulatory compliance (including fee limitations). The result is that a licensed boutique investment bank can offer you a deeper and more experienced team, without the regulatory limitations, all for a lower price.
Ideal approach
These firms are well-suited to represent middle-market and lower-market businesses in raising capital (debt or equity) or in exit/sale opportunities. They ideally position a business by conducting deep due diligence, market research, broad outreach and strategic structuring and marketing, enabling you to make a well-informed decision based on a clear understanding of all your options, optimized for your preferred result.
The M&A and growth-capital world can be difficult to navigate. It’s crucial that you hire a professional firm with your best interests in mind and the capabilities to execute on them, while maximizing the valuation of your business and ensuring any transaction goes as smoothly as possible. The decision about who will provide these pivotal services should not be made without carefully weighing your options, in order to identify the best path forward for you and your business.
To learn more about how to pursue M&A possibilities, contact Crewe.
