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Consulting vs. Investment Banking: Which Approach Suits Your Business Needs?

When a business is approaching a major crossroads, such as a potential sale or merger, leaders often seek out professional advice for managing the process. But not everyone understands the situations in which certain types of advisors excel, and specifically, the differences between consulting vs. investment banking.

entrepreneurs breaking a deal after successfully understanding the differences between consulting vs. investment banking

Advisors focusing on business services fall into two general categories:

  1. Those you pay for completion of a defined task on a commission or incentive fee basis, and
  2. Those you pay for expert services on a time-based or fixed-fee basis.

If you’re thinking that this sounds similar to advisors who provide personal investment services, you’re right. That field is also divided into two main groups:

  1. Stockbrokers, who prefer to execute trades and not spend too much time hashing through decisions about how much to save or how, and 
  2. Wealth advisors, who prioritize discussions about how much to save, only trading when it’s necessary to achieve the client’s goals.

If you’re unsure whether your business needs deal consulting vs. investment banking services, read on to learn more about how the two categories differ.

Who Benefits from the Investment Banking Model

In the market for capital that supports small to mid-sized businesses, the primary source of advice is the corporate version of a stockbroker. Business brokers, M&A advisors and investment bankers help businesses complete transactions such as selling all, or part, of a business’s assets or stock to investors, lenders or corporate acquirers. Almost universally, they do this for a fee that is a percentage of the deal value.

It’s fair to ask, in this model, who gets the best help?

The answer is companies with:

  • Bigger deals
  • Easier deals
  • More certain deals
  • Repeat transaction needs

We tend to think of these companies as publicly-traded or institutional-grade, repeat players doing transactions like mergers, acquisitions, loans and equity capital raises. But they might also be privately held businesses, new to the market and sometimes desperate to transact, with few good no-deal alternatives.

Investment banking professionals tend to favor working these types of deals. Why? Because they close quickly and efficiently, and ideally involve clear-cut business transactions between sophisticated companies where the outcome has little risk.

Who Benefits from the Consulting Model

However, not all business sale or capital-raising scenarios fit this mold, and this is what Oaklyn Consulting’s hyperspecialized consulting model was built to address — catering to the unique needs of small to mid-sized businesses when they don’t align with the traditional investment banking business relationship.

We serve an unmet need in the market by providing independent advice for the transactions of small and medium-sized businesses. Our clients’ situations are characterized by:

  • Smaller deals
  • Complex deals or decision-making processes
  • Deals where there are attractive no-deal alternatives
  • Being new to the capital markets.

In the same way as a personal wealth advisor, we provide business clients with high-end, independent advice focused on their reaching great decisions about capital transactions.

Here’s how we’re different.

Consulting vs. Investment Banking: Key Differences

Traditionally, small to mid-sized companies engaging investment bankers pay an upfront retainer of between $40,000 and $60,000, plus a success fee, often between 3% and 6% of the total deal value.

Investment banking success fees are calculated using one of several common formulas. One of the most popular is the Double Lehman, in which the investment banker receives 10% of the first $1 million of the transaction, 8% for the next $1 million, 6% for the next, and so on. For everything above $4 million, the investment banker receives 2%. For example, a deal of $15 million would result in a success fee of $500,000 (3.33%).

However, this model has limitations, especially in scenarios such as:

  1. Small Business Sales: For businesses valued at $5 million, a typical minimum investment banking fee of $700,000 can significantly impact the transaction’s proceeds to the seller.
  2. Uncertain Seller Intent: Investment bankers may be hesitant to commit time to deals where the owner is unsure about selling, as their earnings are tied to successful transactions.
  3. Complex Sales Dynamics: Disagreements among owners or ambiguous sale values may also deter investment bankers from investing effort.

How Oaklyn Consulting’s Tailored Model Is Different

Looking more closely at consulting vs. investment banking, here’s how Oaklyn Consulting’s hyperspecialized consulting model sets us apart:

  1. Hourly Billing, No Success Fee: Unlike traditional investment banking, we bill by the hour, ensuring a straightforward business relationship. We don’t charge success fees.
  2. Objective Consultation: Our model promotes true objectivity. We don’t have a vested interest in the success of a sale, allowing us to guide clients through decisions that may involve options beyond selling. We prefer clients who are weighing their options and can walk from a deal when it isn’t right. We feel best when the ratio of clients who close a deal is in balance with those who pass on the opportunity.
  3. Tailored for Smaller Companies: Small and mid-sized companies often struggle to receive high-end, cost-effective service from traditional investment bankers. Oaklyn Consulting fills this void, offering clear, thoughtful consulting assistance tailored to unique circumstances.
  4. Available for nonprofits, professional services firms and co-ops: When deal value is ambiguous because of ownership structure, compensation or other factors, Oaklyn Consulting can help without extensive discussion about what the base for its commissions will be.

Advisory Services for Unique Business Situations

Our transparent and flexible consulting model can also be a lifeline for portfolio companies and venture capital funds navigating challenging situations, ensuring a strategic approach when a straightforward sale may not be feasible.

We work exclusively with clients facing pain points, working with them to determine the best solution for their circumstances. By doing so, we offer investment bankers a face-saving way to serve clients who might not align with their traditional service model.
If your business situation is not attracting the advisors you want, give us a call. Oaklyn Consulting delivers a premium level of service for complex business sale scenarios that simply does not exist elsewhere.

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