Sell a business? Understand the M&A counseling fee structure
M&A advisory firms, also known as investment banks, retain new clients with a negotiable letter of commitment that describes the services to be provided, the fee structure, and other general terms of the agreement. This article presents an overview of the three most common components of an M&A advisor fee structure:
* Retention rate
* Success rate
* Expense reimbursement rate
The inclusion or exclusion of these three components will vary, depending on the investment bank, the size of the operation and the particular client. For example, bulky support investment banks negotiating deals valued at more than $ 100 million (enterprise value) will likely have a fee structure that involves all three components. The fee structure of middle market investment banks can include all three components, but often the expense reimbursement fee is the first to be negotiated outside of the contract. And for smaller mid-market offerings, it’s not uncommon for the initial fee to be credited to the hit fee or to be waived entirely. Trade brokers negotiating somewhat smaller deals will generally only include a hit fee. In all cases, the bulk of an M&A advisor’s compensation is in the success rate.
Success rate
The main fee, the success fee, is usually a percentage of the business value (EV) of the business for sale and is dependent on a successful transaction. Therefore, if the deal is not closed, the advisor is not paid his main fee.
The success rate can further be determined according to the traditional Lehman scale (i.e. single, double and triple) and other similar formulas in which an initial percentage of the value of the company is charged for a minimum sales price and is charges a lower descending percentage on amounts. exceeding that minimum. This structure can also be adapted to increasing percentages, which can provide stronger incentives for the M&A advisor to negotiate the best possible closing terms.
Retention rate
The amount of the retention fee charged also depends on the size and complexity of the deal. The initial retention fee can be a percentage of the value of the business, but it is usually presented as a flat fee up front. Some companies schedule a series of retention fee payments associated with predefined deal milestones. The advance fee is normally very negotiable.
Expense reimbursement rate
The expense reimbursement rate would include any out-of-pocket travel and other ancillary costs incurred by the M&A advisor working to close the transaction. The larger the size of the transaction, the more likely expenses will accrue.