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31 Mar M&A Advisor Fees: Retainers, Successes & Ancillary Expenses

Fees are an unavoidable aspect of doing a deal. It is also unfortunate that many a deal-maker is very often cagey about the rate they may charge, why they charge a particular fee and how they relate with one another. Fees vary depending on whether you have engaged a full-service investment bank, a business broker or a mid-market M&A intermediary. The general principles often remain the same, but the overall costs and justifications for them can vary greatly. In this article, we will discuss some of the more common fees inherent in a transaction, the reason for them and how they may differ depending on the type/size of business, the type of transaction, and the intermediary with whom you would engage. Keep in mind, such fees may also differ over time as well. As I like to keep all articles “evergreen” time may vary or change the numbers discussed herein so there are no guarantees that things will be maintained at their current status quo.

Retainer/Engagement Fees

Often, and sometimes surprisingly, one of the most hotly debated fees in at least the lower mid-market is the client engagement and retainer fee. This fee can either be charged up front as a standard flat fee or is often drawn-out and invoiced on a monthly basis, with at least some larger portion of the fee due upfront. Depending on the depth of experience within the firm, the size of the transaction and thus the amount of up-front work required to take the opportunity to market, retainer fees may range anywhere from $30,000 to over $100,000. Sometimes such fees may be exacted up-front, while other firms may allow for monthly invoicing of say $5,000 to $15,000 per month. Some firms may provide a refund of at least part or all of the retainer fee upon successful deal closure, but not all.

We will typically never go below $5,000 dollars for a monthly retainer, regardless of the size of the particular deal in question. Those on the lower end of the size spectrum, typically have more of an issue in taking a retainer fee when doing the deal. This is true for a number of reasons. First, they do not like paying out a decent amount month-over-month with no guarantees of eventual deal closure. In addition, some owners are wary of the finance-types coming in and slapping them with large fees. Finally, some owners do not like the idea of feeling overly committed to a deal. In other words, nothing lost, nothing gained gives issuers a greater reason to back out if something goes awry. The following key points outline some of my most compelling reasons for not balking too hard at paying a retainer fee:

  • It commits the seller to the course of action. Like earnest money when buying a house any deal-maker wants to know the seller has some skin in the game. It’s a way of committing to the particular course of action. In this way, the retainer fee should not be too small to make it easy to walk away. That is why some larger banks will charge larger fees for larger clients. Charging a larger fee is done not because it requires that much more marginal work than a similar, smaller client, but the larger fee is often used as a psychological tool. The logic there is: the more it stings, the more committed the seller is to sell. If the seller has no skin in the game, s/he can back out at any moment and ultimately the advisor and his firm is left holding the proverbial bag.
  • It helps to cover the intermediary’s fixed costs. Despite what the seller may think, the intermediary typically has his own high fixed costs inherent in prepping and working each deal. Most retainers are not usurious by any means. They are simply a way of helping to assuage the total costs of running a business that’s highly human-capital-intensive, not to mention the cost of compliance. Most advisors and bankers do not make their money by charging retainers, it just helps them not to lose it.
  • It incentivizes the intermediary. If an intermediary and his/her team were working several deals at the same time, with some paying retainers and others not, then those clients not paying the fee will typically become the “if I have time after I serve my paying clients, then I’ll move over to this charity case…” That’s not a good situation to be in if you’re a motivated seller looking for a reputable firm to do your deal, as reputable firms will always have other clients with whom they’re working and they don’t have time to work for free.

Other upfront and ancillary expenses may be charged with the retainer fee. In addition, expenses inherent to travel, etc. will typically be invoiced separate from the retainer fees, but everything–of course–is subject to negotiation. We have discussed engagement and retainer fees previously here.

Success/Back-end Fees

The amount you pay in a success fee, ranges and typically is most dependent on the valuation and/or size of your company. It’s great news for larger businesses, as larger companies tend to pay much less per marginal dollar in deal size than the smaller businesses. This is true for a number of reasons. First, smaller businesses are typically just as much or more work than the larger clients (thanks to both shareholder’s and general deal risks). Second, larger, more established firms with consistent cash flows are frequently much easier to sell. If a business is successfully performing, it is generally much easier to find a buyer.

For lower mid-market M&A transactions, expect to pay a standard Lehman formula and, if you’re smaller, a double Lehman–to help cover the excess cost of being small and requiring more human and capital input to get the deal done. Below I have outlined what typical fees might look like in a lower mid-market deal on a double-Lehman sliding scale.
double lehman scale investment banking fees

Unfortunately the Lehman and double-Lehman methods leave some holes in the incentive structure for investment bankers. For instance, the Lehman formula does not provide ample incentives for an M&A intermediary to sell the business at the highest possible price. In fact, the reverse is true in the aforementioned formula: for every incremental increase in value, the intermediary or M&A advisor actually makes less money. As a result, today’s thoughtful investment bankers are adopting a strategy often referred to as the “aligned” method for investment banking fees.

aligned investment banking fee schedule

The aforementioned scale–as always– includes the assumption that the investment banker will charge minimum fees. More importantly, sellers should note the overall percentage paid for services rendered remains unchanged and that the incentives to the investment banker for getting the best deal possible for the client are greatly enhanced. In the “aligned” method an investment banker actually makes less than in the double Lehman method if s/he fails to obtain the best possible price outcome from a competitive bidding process. Below you will find a simplified version of the above.

aligned method investment banker fee

Note that the percentage increase is marginally incremental on the dollars within the purchase price range based on Total Transaction Value (TTV), not back to dollar one. Hence the banker has an aligned incentive with the seller or issuer. It is also helpful to note that in this scenario we are talking about a deal in the $50,000,000 to $70,000,000 price range. Smaller deals that often require more work will demand a higher fee than those mentioned in this example (think double or even triple depending on the size, industry and complexity).

Like I mentioned before, some firms will actually deduct any previous retainers (or a portion of previous retainers) from the final success fee from the business, but this is extremely rare. Some, but not all so it should certainly not be expected. There are a number of other forms of a modified Lehman which are used, some of which are negotiable, but it mostly depends on the firm with whom you have engaged. If your business is a smaller firm and is still in need of good representation, the total fees you pay will likely be on par with the fees paid to larger companies. Typically smaller companies are more difficult, need seller preparation and require more hand-holding throughout the process. These features are a contributing factor to the premium paid by smaller firms. This is at least one of the reasons smaller, boutique middle market M&A shops beat comparable bulge-bracket investment banks in revenues and profitability.

Minimum and/or Breakup Fees

When times are good and work is plentiful, minimum fees upon deal closure are charged much less frequently. Minimum fees are often more par for the course in smaller deals, but if your business boasts a much larger EBITDA, has great, solid and diversified revenues, a minimum fee is typically not necessary. In addition, if the advisor/client relationship is worked-out correctly and the seller has an appropriate expectation on value, then the business should sell for at least an expected threshold amount and no minimum fee will need to be paid. Minimum fees also exact more from buyers who’ve built a nice business and should reap more of the compensation at the time of deal closure.

While break-up fees are more rare in middle market deals, they can occur. A break-up fee includes an incentive for the seller wherein the seller is required to pay a fee in the unlikely event s/he backs out of a closely negotiated deal with a quality buyer. A full treatise on investment banking breakup fees is likely worth its own reference.

Other Non-Cash Compensation

In addition to engagement and success fees, many investment bankers will request non-cash compensation in the form of options or warrants. As deal “sweeteners,” non-cash compensation can be a win-win and typically are not exercised until some future date. When they are exercised, warrants can provide a cash infusion (albeit with some dilution) to the issuer and an immediate gain to the investment bank. Non-cash compensation is more typical in capital formation projects than in sell-side M&A transactions.

Very few business brokers, M&A advisors or sell-side investment bankers post their “fees” online. We certainly do not. The reason: no two deal is the same and depending on the size of the deal the amount charge in engagement and back-end fees could vary widely. What is included here is meant to paint the picture as a simple “example” for what one might expect when it comes time to pay and investment banker to manage a sell-side process for mergers and acquisitions. Being too transparent on fees does not benefit the investment bank much. It also leaves less room on the table for negotiating better terms with a potential client. In all, everything is negotiable and if you have built a good enough business that can sell itself, then the chips usually fall in your favor naturally.

  • Jacint Soler

    In Spain and most of Continental Europe, a modest retainer deductible
    from success fee has become common practice on small to medium-sized M & A deals.
    In the “good old days”, generous retainers without deduction from success fee
    were the rule. We believe the current situation is more balanced for both

    • Nate Nead

      I agree Jacint. This is particularly true when you start to reach down into the lower mid-market where the fee percentage can be a bit higher than the larger deals.

  • Very good post, Nate. How do these M&A fee structures morph into investment funding?

    P.S. I like Double PERCENTAGE Extended Lehman – 10% for first 10M, 9% for next 10M, etc.

    • Nate Nead

      Hi Kenton,

      Fortunately everything is always up for negotiation.

      That said, for smaller raises we’re similar to M&A in that we’ll charge a double Lehman (i.e. 10%, 8%, 6%, 4%), not the double percentage (i.e. 10%, 9%, 8%, 7% etc.) as you say, but it’s not entirely uncommon. As is true with both M&A and capital raising, the larger the deal, typically the easier it is to close and the tougher it is to justify charging higher fees on the first couple million $$ of MANY.

      In many cases, flat fees are common as well. It depends on the initial perceived difficulty in the mind of the deal-maker as to how easy/hard it will be to raise the money. The easier the perceived task (typically dependent on the quality of the oppty), the more the number could be put in flux.

      Raising capital is almost always harder than sell-side mandates. As such, the deal-makers need to be compensated for their time. And since capital raisers are only as good as their last deal, they have a right to be very picky and/or charge higher fees if they perceive the client or deal itself could become prickly later.

      • Yes precept ion and need on both sides of the table will determine the final up-front fees and commissions. For smaller deals, I use a base percentage, such as 12%, x (.99999999 ^ FundingAmount). So for $10M, that’s 12% x .905 = 10.9% (without up-front fees).

        • Nate Nead

          Thank you for sharing Kenton. Valuable insight.

  • Stuart

    We’ve found a staged milestone approach quite effective in addressing concerns regarding a monthly retainer & unknown (at least from the client side) activity levels. The staged milestone model allows an initial market testing / sounding to evaluate & refine the attractiveness of a particular business & its associated investment or acquisition proposition before committing to the wider pitch process. It also allows a client the flexibility to put a project on hold should market feedback indicate a lack of attractiveness relative to expectations. Quantum of milestone payments vary deal by deal depending on the level of upfront work required

    • Nate Nead

      Thank you for your comments Stuart. This approach seems very fair for a client who may be concerned about paying for a service where performance is never guaranteed. It can also help protect the advisor from an unscrupulous client.

      I do feel that advisors provide a very valuable service for which they should be paid. They also take on a great risk themselves by engaging in an arrangement where the compensation is almost completely tied to the tail. I’m all for making the commission 95% of the total. However, the opportunity cost to the advisor also needs to be considered and thus the advisor should be getting paid, even if just Quantum milestone payments as you say.

  • Edris Dzulkifli

    Hi! I’m trying to learn more about M&A services, and I’m very curious to know how the fees would work if the client is the buyer and not the seller. Would percentage fees apply in this case?

    • Nate Nead

      Hi Edris,

      Thank you for your interest. If you’re looking at acquiring a business, the fees are typically flat and most often lower than a sell-side fee, but again the fees are always dependent on the size of the company you’re looking to acquire. The bigger the deal, the smaller the fee.

  • Daniel Herr

    Nate, it really is a shame that some M&A firms are not straight forward about their success fees and I think you do a good job of breaking this down for business owners.

    I originally came across your post when looking for a simple Lehman Fee calculator (which I never found). While the calculation is obviously not that difficult for some folks to figure out (especially if you just remember that it is $150k for first $5m plus 1% of the balance or $200k for the first $10m TEV + 1% of balance), I had some time to kill one evening and created an online Lehman Fee Calculator based upon EBITDA and Multiple that I figured some business owners who are newer to M&A advisories, sellside firms, and unfunded sponsors fees might find useful to bookmark and/or reference, so figured I would share here: danherrski.github.io/lehmanfeecalculator

    • Nate Nead

      Thank you for sharing Daniel. That is very helpful. Glad to see someone providing at least some automation to the process of fees. The reality of the situation is that fee structures are almost always negotiated, within a reasonable range. This is particularly true for all middle and lower middle-market deals. Most of our recent investment banking agreements have adopted a structure that provides greater incentive to the investment banker on the deal in that the banker is paid more as the deal bodes better for the client. These structures are crafted in several different ways not outlined here.

      In fact, I received an email the other day where someone wanted our fee list in a PDF. I could give a range or “back of the napkin” guess, but the reality is that it depends on the deal.

  • This is one of the best articles on the topic. Thanks!

    Ted J. Leverette

    The Original Business Buyer Advocate ®

    “Partner” On-Call Network, LLC

    • Nate Nead

      Thank you Ted and thank you for visiting.

  • Party_In_Left_Field

    Very insightful article. I’m curious if the fee structure is relatively the same for raising capital. Example: tech company start-up needs $50 million and the intermediary, e.g., an IB, raises the $50 million (or more) based on an agreed valuation. I haven’t found much information on this as most all of the IB information I see is in context of M&A. As a corollary, a sticky issue with this is that the fees paid to the intermediary to raise the capital cannot come from the capital raised as those investors would not likely agree to have their funds used to pay IB-type fees.

    • Nate Nead

      Fees for raising capital can be similar. Remember, there is an inverse correlation between the amount raised/issued and the backend fee. Investors expect transaction fees on private deals for raising capital. There are always fees when securities are bought and sold. Because the market for such securities is not as liquid and can be more complex than say eTrade, the cost of transacting in this realm is going to be higher. Unless the fees are usurious, truly interested investors rarely balk.

  • Doug

    Hello, thank you for the article. I’m wondering: What’s the difference between a “success fee” and “commission” as it relates to sell side M&A transactions? Are there specific differenciations that distinguish the two other than just what you choose to call them?

    • Nate Nead

      @Doug Thank you for reaching out. This article assumes they are one in the same. However, depending on how an Investment Banking Engagement Agreement is written, there may be nuanced differences in how they are defined or structured. However, both will most likely assume securities have been sold. I hope this helps.

      • Doug

        Thanks for your reply, Nate!