By Wesley Legg
When choosing an M&A advisor to sell a privately held middle-market business, you want to consider a variety of factors, such as their experience, process, team and fees. If you’re looking for an M&A advisor you’ll want to read our “Choosing an M&A Advisor” blog first. That said, here are some of the more common fees and fee structures, the logic behind them, and how they may differ depending on the type/size of business and the type of transaction.
The standard M&A advisor fee model includes a retainer and a success fee.
M&A Advisor Retainers
- The selling company commits to a fixed retainer at the beginning of the engagement. Some firms will invoice monthly over the course of the transaction and credit this fee against the success fee once the deal closes.. This fee can also be called a work fee, engagement fee, or upfront fee.
- For larger transactions, the work fees are usually $100,000 or more. For mid-size firms, this fee is usually $5,000 to $15,000 a month. Interestingly, firms that work on transactions valued under $5 million often do not charge a work fee.
- It’s very unusual for an M&A advisor to take on a sell-side engagement without a retainer. While retainers typically do not cover the cost of an M&A advisor’s overhead, it does help to ensure that a seller is serious about selling their business and help offset some of the direct costs associated with the project.
M&A Advisor Success Fee Structures
There are three primary success fee structures; The Lehman Formula, Flat Fee and Tiered Fee.
- The Lehman formula was originally used for financing engagements but somehow also came to be applied to M&A transactions. In the formula, the M&A firm is paid a lower percentage of the last million than the first million. This is often called a “decelerator”. In this fee structure, the advisor is not as aligned with the seller to get as high a valuation as possible. The fee structure incentivizes the M&A advisor toward just getting a deal done because the incremental dollars associated with a premium have lower incremental fees. An example of this fee structure is below:
- › 5% fee up to an Enterprise Value of $10mm: $500,000;
- › Plus 4% for the first additional million: $40,000;
- › Plus 3% for the second additional million: $30,000;
- › Plus 2% for the third additional million: $20,000;
- › Plus 1% for each additional million thereafter: $10,000
- › Total fee paid to an M&A firm for a $15mm transaction: $610,000
- › Total fee paid to an M&A firm for a $20mm transaction: $660,000
- The flat fee is what it sounds like. It is a flat percentage of the deal no matter the size.
- The tiered fee is the opposite of the Lehman formula. Under a tiered fee structure an M&A advisor’s success fees are a larger percentage of the last million than the first million. This is often called an “accelerator”. In this fee structure, the advisor is aligned with the seller to get as high a valuation as possible, as the fee is directly related to valuation. See the example below:
- › 3% up to an Enterprise Value of $10mm: $300,000;
- › Plus 4% for incremental value from $10mm to $15mm;
- › Plus 5% for incremental value above $15mm;
- › Total fee paid an M&A firm for a $15mm transaction: $500,000
- › Total fee paid an M&A firm for a $20mm transaction: $750,000
M&A Advisor Success Fees
M&A advisory fees can differ based on the type of firm and size of the deal.
- Large boutique banks (like Harris Williams, Stephens or Houlihan Lokey) have a lot of overhead with multiple offices and teams with expertise across a broad range of industries. They typically have a minimum fee threshold of at least $1,000,000, but can and like to generate several million dollars in fees. As a result, they are generally looking to advise on transactions that are $100 million and above. If they take on smaller deals they have to charge a much larger percentage of the deal to reach their minimum threshold.
- Regional and small boutiques are built for transactions in the $10 to $200 million range, because they generally have less overhead. While they can have deep expertise in a few industries, they generally have fewer locations and teams overall. These firms often time have more expertise and experience with the unique challenges of a smaller deal and overall their minimum fee threshold is lower than that of the large boutiques. While the minimum thresholds are often smaller, the percentage of the deal can have a wide range depending on the complexity of the deal; typically the smaller the deal size the higher the percentage success fee.
- Success fees become more challenging in the smaller size transactions, because the amount of work required to sell a $5 million business is not significantly less than the effort required for a $25 million exit. The actual dollar fees may be lower, but as a percentage of the purchase price the fees are typically higher.
If you’re considering selling or recapitalizing your business, we’d be happy to help. For questions concerning this matter, contact us.
About Founders Investment Banking
Founders Investment Banking (Founders) is a merger, acquisition & strategic advisory firm serving middle-market companies. Founders’ focus is on oil and gas, SaaS/software, industrials, internet, digital media and healthcare companies located nationwide, as well as companies based in the Southeast across a variety of industries. Founders’ skilled professionals, proven expertise and process-based solutions help companies access growth capital, make acquisitions, and/or prepare for and execute liquidity events to achieve specific financial goals. In order to assist Founders Investment Banking with securities related transactions certain Principals are registered investment banking agents of M&A Securities Group, Inc., member FINRA/SiPC. M&A Securities Group and Founders are not affiliated entities. For more information, visit www.foundersib.com.