Middle Market Investment Banks – Mostly on the Sell Side
Investment bankers represent either the seller or the buyer in a given transaction. However, the vast majority of middle market investment bankers and business intermediaries represent the sell-side. Why it that?
The Reason Most Middle Market M&A Firms on the Sell-Side
The vast majority of the compensation that an investment banker receives is tied to a success fee, payable upon the successful completion of a transaction and typically a percentage of the enterprise value of the business being sold. Because of this, bankers prefer client engagements with a sufficiently high probability of a transaction occurring. For a number of reasons, which we won’t explore here, there seems to be a higher likelihood of a transaction occurring among sell-side clients (versus buy-side clients) when working on middle market-sized deals.
This explains the tendency for middle market investment bankers to represent the sell-side clients more often than the buy-side clients. While there are middle market investment banking firms who work on the buy-side, they probably represent less than 5% of the M&A firm population. The buy-side bankers also tend to ask for a larger retainer fee, presumably to compensate for the greater uncertainty in eventual outcomes.
Larger transactions, however, do not exhibit the same dynamics and have more of an equal probability of closure between the sell-side and the buy-side. The larger transactions therefore attract more buy-side representation from bulge bracket investment banks.
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