What is the Difference Between a Business Broker and an Investment Bank?

By Generational Equity


The answer to this question is this: Plenty!

Now at the outset let me say that business brokers play a key role in the M&A world. In fact, they do a great job handling smaller transactions (typically those valued below $1 million) and are important to that segment of our economy.

So, if you can’t afford an investment bank, especially one that focuses on the lower middle market (transactions valued from $1 million to say $50 million), then by all means use a business broker. But keep in mind that you get what you pay for and here are some of the key differences:

  • Local vs. National/International Scope
  • Number of Deals Completed Annually
  • Number of Valuation Associates on Staff
  • Number of Dealmakers on Staff and Depth of Experience
  • Number of Associates Overall
  • Access to External Buyer Databases
  • Creation of Proprietary Internal Buyer Databases
  • Relationships with Private Equity Firms
  • Relationships with Active Strategic Buyers
  • Industry Awards and Accolades
  • Full Range of Cradle to Grave Services (Strategic/Tactical Growth Strategies, Wealth Management Services, etc.)
  • Typical Fees Charged
  • The Company That You Keep!

In all these categories, an experienced investment bank like Generational is a far better choice, again, depending on your company’s size. Generally speaking, middle market investment banks are not localized in their buyer relationships, they are national and international which is key to an optimal deal. We deal with buyers throughout the world and have developed solid relationships with them.

A local business broker may close 2-3 transactions annually. Last year Generational closed 172 transactions and we are on a pace to break that number in 2022. Refinitiv ranked us as number one for deals valued up to $25 million and number two in deals up to $100 million in 2021 (FYI, no one has closed more deals in the middle market the past nine years than Generational).

Both our Valuation Team and our Dealmakers, which number over 50 people, are some of the finest professionals in our industry. Overall, we have over 300 Associates located throughout our 16 offices in North America. Most business brokers have 2-3 members. Our Dealmakers are some of the most experienced in the middle market, having extensive years in closing deals. One other item to note: our deal teams are focused exclusively on selling businesses, they don't work in business development, allowing them to work solely on finding buyers. Brokers have to split their time between finding new business AND closing deals.

External M&A databases are extremely expensive. We have the size and scope of budget to have multiple licenses across our teams giving them access to leading research products such as Standard & Poors Cap IQ, IBISWorld and many others. In addition to external sources, we have a proprietary buyer database of over 35K active buyers which we call DealForce. These buyers have told us specifically what they are looking for in acquisition targets and we are able to provide them with a funnel of qualified sellers. This is a huge difference between a broker and an investment bank and it is a significant benefit to our clients.  

Private equity firms (PE) have gotten more and more active in the past 10 years in the middle market. They have learned that it is far less risky to make a number of smaller acquisitions called “add-ons” in a specific industry than to “bet the farm” on a single much larger acquisition. Because of this, a substantial number of the buyers in our proprietary buyer database are PE firms. Most business brokers focus on a set of buyers that they approach on a local/regional basis or on an industry level for all their deals.

Another advantage to using a middle market investment bank is that a firm like Generational has years of established relationships with thousands of active strategic buyers as well. Knowing what a strategic buyer is looking for, either vertical or horizontally, is a huge advantage to you the seller.

One more big difference: Firms like Generational have the industry accolades to prove their ability to provide great service. Most business brokers, because of their smaller scope, do not have this ability. For example, here are just a short list of industry awards we have won:

This is just a small sampling; you can see a full list of our accolades here.

Perhaps most critical to business owners, is that middle market investment banks like Generational can provide a full range of services to their clients. For example, if a client’s business is not “buyer ready” our experienced consulting firm can provide tactical and strategic growth plans that, over time, can prep a company to grow, flourish, and reach new levels of productivity and profitability.

Once we sell a company, our wealth advisory firm is there to protect and grow a client’s newly found wealth and financial legacy for years to come. Both of these services are really unique to middle market investment banks. Most business brokers sub-contract these services to third parties (if they provide them at all).

One other key point is the differences in fees charged by brokers vs. reputable investment banks.  Most brokers do not charge an upfront or commitment fee; investment banks do in order to ensure you are committed to the process and cover the costs of the services outlined above. However, what brokers often do is make that up on the "success fee" (the fee charged when a deal closes). Most brokers charge between 10-12%, most investment banks use the double Lehman success fee formula which usually averages out to between 3-6% depending on the size of the deal (and in the case of Generational, the commitment fee is refunded back out of the success fee).

Finally, as the old saying goes, they know you by the company that you keep, i.e., who you are associated with professionally. Our firm has a number of strategic alliances, including:

  • The Nicklaus Companies
  • Vistage Worldwide
  • The M&A Advisor
  • CIBC
  • Harvard Business School
  • The Association of Corporate Growth (ACG)
  • The Exit Planning Institute
  • The Alliance of Merger & Acquisition Advisors (AMAA)
  • The Hargrove Firm

Some business brokers may belong to the ACG or the AMAA, but the other relationships listed above would be beyond the reach of most.

So, you can see that there are substantial differences between a business broker and a middle market investment bank like Generational. And this is just a short list.

Again, business brokers play a key and vital role at the lower valuation levels of our economy. However, as we discussed a few weeks ago in an Insight post, as with all things, you really get what you pay for and as we see it, hiring a firm like Generational is not a “cost” but an investment in the future for not only you, but your company. It is well worth it according to our clients:

To discover more of what we can offer you compared to your local business broker, please either call us at 972-232-1121 or visit our website and leave us with your contact details. Again, our services are not for every business owner, and we realize that. But we truly believe that the scope of what we offer provides our clients with the best possible opportunity for an optimal deal.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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