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. 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.

M&A Advisor Retainers

The standard M&A advisor fee model includes a retainer and a success fee.

Typically, the selling company commits to a fixed retainer at the beginning of the engagement. Some firms charge an upfront front retainer, and some will invoice monthly or at certain defined deal milestones over the course of the transaction.  Most advisors credit this fee against the success fee when the deal closes. This fee can also be called a work fee, engagement fee, or upfront fee.

There can be a wide range in the retainers paid for in a transaction, depending on the advisor and the size of the deal.  For private companies using an M&A advisor, the total retainer is typically between $50,000 to $100,000 and is paid monthly.  If for any reason the transaction is put on hold, advisors will often pause the monthly retainer fee.

It’s very unusual for an M&A advisor to take on a sell-side engagement without a retainer. Retainers in the amounts noted above are much lower than the overhead of a reputable advisory firm, but they do help ensure a client is serious about selling their business and help offset some of the costs associated with the project.

M&A Advisor Success Fees

There are three primary success fee structures: flat fee, Lehman formula and tiered fees.

• Flat Fee: The flat fee is what it sounds like. It is a flat percentage of the deal no matter the size.
• The Lehman Formula: Originally for financing engagements, this has been adapted for M&A, with a decreasing percentage applied to higher transaction values. 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”, and means the advisors earn a lower percentage on the latter million compared to the first. While this might encourage closing a deal, it does not necessarily incentivize maximizing the sale price.
• Tiered Fee: 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.

Success fees become more challenging in the smaller size transactions, because the amount of work required to sell a $10 million business is little to no less 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.

M&A Advisor Fees vs. Value

The value of a proficient M&A advisor cannot be overstated, particularly when weighed against the fees paid for their services. A good advisor brings a wealth of experience and a network of potential buyers or investors, significantly enhancing the likelihood of not just closing a deal but doing so under terms favorable to their client. Their expertise in deal structuring, negotiation, and due diligence processes is crucial for maximizing the transaction value. This is not merely about achieving a higher sale price but also entails structuring the deal in a way that can offer tax advantages, better terms, lower ongoing risks, achieve other objectives specific to the sellers’ situation that improve the overall outcome for the business owner.

Beyond financial gains, an adept M&A advisor plays a pivotal role in mitigating the stress and disruption often experienced by business owners and their operations during the sales process. They act as a buffer, absorbing much of the workload related to the transaction, from preliminary market analysis and buyer outreach to the management of due diligence inquiries. This allows the business owner to remain focused on running the company, maintaining its performance during the sale process, which is crucial for preserving the business’s value. Moreover, their presence increases the probability of the deal successfully closing, navigating through common pitfalls and challenges with professionalism and foresight. The blend of financial acumen, strategic negotiation skills, and the ability to safeguard the operational continuity of the business makes the investment in a skilled M&A advisor not just valuable but indispensable for securing a successful transaction.