The Investment Banking Landscape: Different Types of M&A Firms
How to differentiate between the types of firms and which is best for selling your business.
There are different types of firms that a business owner can engage with for the sale of his or her businesses. Each of these firms can provide a different set of services to the business owner.
Investment banks are differentiated based on the size of the transactions that they work on, their geographic reach and the services provided. The different types of firms include boutique investment banks, regional investment banks, bulge bracket investment banks, M&A advisory firms and business brokerages. For each of these firms, it is important to analyze which is the most likely to be beneficial as an M&A advisor for your business.
Boutique Investment Firms
Over the past decade, several 'boutique’ investment banks have entered the financial landscape. Boutique investment banks are non-full service and specialize in some particular aspects of investment banking, such as raising capital or mergers and acquisitions (buy- and sell-side engagements). These firms will typically range in size between 1 to 100 employees and will have only a few locations in a relatively small geographic region. There are, however, some larger firms that have specialization in a particular industry and can be classified as boutique.
Most boutique investment banks work with middle-market firms on deal sizes with enterprise value between $5 million and $100 million. Investment banks (i-banks) with more specific industry expertise can work on larger deals.
Many boutique investment banks are founded or led by former partners of large banks who left because they were eager to get more involved in the process. Also, boutique investment banks filled in the gaps left by most big banks which would not look at smaller deals unless there was some exceptional value attached to it. At boutique investment banks, there tends to be more intimate interaction between the firm and the business owner.
Pros: Boutique investment banks specialize in a particular industry, or a specific transaction, or they may specialize in certain geographical areas and, hence, are well-known in their niche. Their fees are lower than bulge bracket investment banks, but these smaller firms can offer unwavering attention to the clients, resulting in long-term relationships as opposed to transaction-based ones. Also in the boutique firm, the dealmaker may be more directly involved in completing the transaction as opposed to larger investment banks where analysts and associates would do a bulk of the work in a deal.
Cons: Boutique investment banks may not have the network of contacts that a larger firm does to find the best prospective buyers. Online social networking and deal sourcing platforms are narrowing that gap. Smaller firms might lack the necessary resources of professionals to properly execute large and complex transactions. Another downside of the boutique investment bank is that there is limited scope on the suite of services to offer growing companies, such as the ability to take a company public in an IPO. Oftentimes, the services are limited to the expertise of the deal-makers within the firm.
Regional Investment Banks
As the name implies, regional investment banks typically focus on a certain area or region. These firms will have multiple offices with a national presence. Some banks may even have operations in many different countries. Deals for regional investment banks can be comparable in size to the bulge bracket i-banks, but often they will be less than $1 billion. Typical deal size will be higher than the boutiques and range between $100 million to $1 billion in enterprise value. Most regional investment banks will focus on raising capital or mergers and acquisitions (buy- and sell-side engagements), but the large regional i-banks will provide a full suite of services including equity and debt capital markets, leverage financing and restructuring services.
Examples of larger, well-known regional investment banks would be Lazard, Rothschild, Houlihan, Lokey and Jefferies & Co.
Pros: Regional investment banks provide similar services to boutique firms, but can also offer the comparable resources and deep industry knowledge of bulge bracket investment banks.
Cons: Fees charged by regional investment banks will typically be higher than boutique investment banks due to higher overhead costs in these firms. In some instances, deals that are smaller or lesser in profile may receive a lower level of attention as lead dealmakers are occupied with larger transactions.
Bulge Bracket Investment Banks
Bulge bracket investment banks are the largest entities and corporations in the financial world. The bulge bracket is comprised of top banks that include Bank of America, Merrill Lynch, Morgan Stanley, Citigroup, Deutsche Bank, UBS, Goldman Sachs, Credit Suisse, Barclays Capital and JP Morgan Chase. These banks are massive, multinational firms that have tens of thousands employees worldwide.
The average bulge bracket deals are over $1 billion, but they may execute high profile deals in the upper mid-market. Similar to regional banks, the bulge bracket banks provide both advisory and financing services — and also provide asset management, trading, commercial banking and insurance.
Pros: Bulge bracket investment banks will garner the higher attention and exposure for sell-side mandates.
Cons: If your company is one of the select few high profile mid-market deals suitable for bulge bracket investment banks, you will pay a significant fee premium for their expertise and brand power.
M&A Advisory Firms
An M&A advisory firm is a corporation dedicated to providing guidance on corporate mergers and acquisitions. These firms provide sell-side and buy-side services similar to investment banks, but also provide more consultative ancillary services to the M&A transactions such as advice on exit strategies, business valuation, preparation of pitchbooks, assisting with due diligence and taking part in the negotiations of sales.
M&A advisory firms advise on transactions in the lower mid-market, typically on deals from $5 million to $150 million in enterprise value. The fees assigned for sell-side or buy-side engagements follow industry standard success fee structures, but fees for ancillary services can be charged on an hourly basis. In comparison, investment banks work exclusively on transactional assignments and have minimum success fee expectations, which tend to create a floor for the size of deals that these firms work on.
Pros: M&A advisory firms can provide valuable advice on piecemeal sections of the M&A process, be it valuation, due diligence or exit strategies. These firms also may provide a more cost-effective approach if fees are structured on an hourly basis for a specific deliverable.
Cons: M&A advisory firms tend to hire professionals that have a broad understanding of the M&A process, whereas investment banks tend to hire dealmakers. When engaging a firm to sell your business, ensure that you are hiring a dealmaker that can get the deal done.
Lastly, it is important to look at a business brokerage in relation to the other firms. Business brokerages assist in the sales of businesses typically valued at less than $5 million or that fall in the Main Street category. Business brokerages assist the seller in setting a selling price, preparing marketing materials, conducting buyer searches and coordinating the negotiations. Given the size of the business for sale, the most typical buyer is a private individual rather than a strategic buyer or private equity group. Business brokerages typically market the business to a broad base of potential buyers, whereas other types of firms will employ a more targeted approach. Brokerages will use standard templates and forms to engage multiple listings and also speed up the sale process. Success fees for the listing usually range from 10–12% with no upfront of monthly work fees. Business brokerages tend to take on many simultaneous assignments knowing that some listings will never successfully sell.
Pros: Business brokerages are experienced at advertising Main Street business for sale. They provide guidance to expedite the sale of smaller businesses.
Cons: For mid-market businesses, the transactions tend to be somewhat more complex and require a deep level of understanding in corporate finance. The typical standardized process engaged by a business brokerage are usually not suitable for businesses in the middle market.