27 Sep How Much Should I Pay as a Retainer Fee?
In any business consulting arrangement, the consultant is going to require the consultee for some type of upfront money for performance. How much is paid is typically arbitrary and almost always negotiable. The question is, how much should you pay as a retainer for services rendered? As always, it depends. First , let’s ask a few non-rhetorical questions.
- What type of experience are we talking about? How long has the company been in business?
- What does the firm’s professional network look like? Do the founders have what might be termed a Rolex Rolodex?
- What specific skill-sets are you looking for? Will the consultant have the ability to fulfill the requirements of the particular project?
- What type of references can the firm provide? (this is paramount)
What is paid out in a retainer fee is co-dependent on the level of service your firm feels is requisite with the project at hand. It should also be commensurate with the sheer human capital required to complete the project as well as the overall resources required to complete the service needed.
The Three Dials
Fees charged by investment banks include both cash and non-cash compensation. Cash compensation is typically charged in both an upfront engagement fee and a success or back-end fee, typically as a percentage of the overall deal. Non-cash compensation can include warrants or options. As a sweetener, warrants require those holding them to put up money in, typically at a discount to market. These three dials can be turned up and down as needed. Rarely are any of them eliminated.
We’re consistently asked whether or not we can be paid on strictly a commission basis with no retainer. In most cases, unless the work is pro-bono, we absolutely refuse for a number of reasons. First, in the case of retainers paid for merger and acquisition services, there is typically an out clause in an engagement contract that gives the selling party the ability to walk away from an engagement. A retainer typically helps to seal the commitment of the selling party to the course of action in a transaction. It’s a “put your money where your mouth is” pledge. We don’t work without a retainer for this reason alone. Period.
Second, retainers are fees provided for services paid. In the unfortunate case that a consultant is unable to raise money or complete a deal, they’re not going to be out hundreds of hours of work and effort for naught. It’s not good business to work for free. That’s called charity. In some cases, retainers can be refunded out of any deal success fee, but they’re ultimately just enough to help the surviving entity eek by a living.
Third, retainers provide the seller with capital to take care of expenses they’ll need to work on the project or deal. Advertising and expenses related to pitching the project or opportunity are frequently included in the retainer. Travel expenses are generally not included and billed separately.
Don’t think giving equity or a larger commission portion to your contractor or contracted company will incentivize them. Retainers work best. You ask your salespeople to share in the gains, but most of them should still be paid a base salary. I always have found it interesting that the best salesmen are almost always the ones who demand the larger base. You get what you pay for in just about anything. That same type of scenario holds true with retainer fees as well.
We go back to our original question, “How much should you pay in retainer fees?”
The retainer should typically be enough to feel it, but not enough to hamper cash flows and break the bank.
To answer the question, retainers can range anywhere from $5,000 to $15,000 a month, depending on the need and the services rendered. Some require more. Some require the engagement upfront. I would question the ability and skill of those requiring less. Some also may require a larger portion of the retainer paid up front. If the firm is reputable enough, it may be worth it.
Paying for services can be a difficult pill to swallow. But, unlike products, there’s rarely a P.O.-style format where you rack up a bunch of fees over a period of time, unless of course you’re working with attorneys. In any event, the retainer fee is an often-disputed and more frequently misunderstood aspect of performing projects and doing deals with contractors. When you’re ready to grow your business then sell your business, you typically have to spend money to make money. Just make sure the firm you’re working with can deliver and you’ll find yourself measuring a cash positive ROI.