20 Feb Investment Banking Fees, Lehman Style
Fees in investment banking can vary greatly from firm to firm and from deal to deal. In general, deals requiring greater input of time and resources–especially in the <$20 million range–will cost more on a dollar-for-dollar percentage basis. The included diagram above is the standard “Lehman Formula” established by the defunct Lehman Bros. in the 1970’s. It should help companies attempting to understand what they will be asked to pay for both buy-side and sell-side investment banking. In general, the smaller the deal, the greater % you will be asked to surrender. That is simply how it works.
A retainer fee is a fixed amount that is paid to the investment banker whether the deal is successfully completed or not. In general, successful investment bankers will require a monthly retainer for each deal on which they represent. A retainer does two things. First, it commits the banker by giving him/her proper incentive to work on the account and prepare the business for its eventual sale. In other words, “you get what you pay for.” Second, a proper retainer also helps to commit the seller to a particular course of action—in this case to either raise money or sell a company.
Depending on the complexity and expected length of the deal, the retainer can vary greatly. For instance, for more complex deals the retainer will be more “front-loaded” thus equalizing the greater risk involved in prepping and selling.
Upfront fees are often charged at the time of engagement. In many cases, this is a form of retainer and can often include an upfront retainer fee to ensure the seller is committed. In the event that the work is expected to go quickly an upfront fee could include most or all of the retainer.
No true engagement would be complete without the need for the consultant to avoid out-of-pocket expenses for things like travel, meals, paperwork and entertainment. Typically all such fees associated with a deal are billed directly to the client.
Each deal can generally stand alone, but many are based on the Lehman Formulas shown above. One thing similar with almost every deal is the fact that most success fees are offset by the amount already spent on company retainer costs. That is, retainer fees are generally subtracted from any final success fee.
Depending on the size of the bank you’re dealing with, each ibank will require a minimum close amount for any deal. This amount could range from $100,000 to $1 million and is often dependent on the experience and size of the firm or the size of the deal itself.
The chart does, however, lack details. Please reach out to us directly with questions.