I recently had a fascinating conversation about fees with another M&A professional. We have never worked in the same geographic region, and had no hesitation about openly discussing our firm’s fee structures.
His firm is considerably larger than mine. They employ dozens of professionals, associates and support people.
We agreed pretty quickly on what reasonable fee ranges are for the kind of work that he and his team do. Their fees are very similar to the fees my firm offers in our region.
Working with Clients Who Want to Negotiate Fees
I asked how his firm handles prospective clients who want to negotiate lower fees. His reply surprised me. He explained that they have three tiers of service, gold, silver and bronze.
His firm developed this three tier system after working on some engagements for months, and ultimately losing them to other firms in their area who offered M&A services at lower fees.
He went on to describe their fees for each tier:
– bronze level fees are about half of their gold service fees, and
– silver fees are midway between gold and bronze
The Difference between Gold, Silver and Bronze M&A Advisory Services
Fascinated, I asked what the difference was when clients selected gold, silver or bronze. He explained that there are really two factors that changed depending on the fee scale:
– the quality of the team
– how much effort they invest before giving up on a transaction
My friend said that when a customer agrees to their initial fee offer (the gold level service) they work with the “A team.” My friend is the head of the A team in this firm. Over the years he’d handpicked the very best to work with him on his transactions.
The B team are people in his firm who just don’t have the experience, or just aren’t good enough to be on the A team.
The C team are seconded from a sister firm that works as business brokers.
He explained there’s also a difference in how many hours his firm invests in a silver or bronze transaction. We both agreed that some transactions end up taking two or three times the hours anticipated, and that the right thing to do in each case is to continue until the company is sold. He was quite open about admitting that the commitment level is significantly less with the silver or bronze services. If a transaction doesn’t close after the first round of outbound communications, the firm decides to move on to the next transaction (hoping it will be one of the easy ones).
Why His Firm Offers Three Levels of M&A Services
Personally, my friend has no interest in working on silver or bronze level exit transactions. He’s earned a reputation for being one of the best in the M&A Advisory industry. He prides himself on his exceptionally high success rate (completing 75% of the exits he starts).
But as a partner, he’s pleased his firm offers three qualities of service because:
– after investing time getting to know a company they don’t like losing the business to a firm offering a less expensive service, and
– it gives his firm an opportunity to train new hires and keep their B team players working (he candidly admitted that even in his firm not everyone is an A team player).
The Difference to the Client – Price and Probability of Success
I asked about the difference for their clients between gold, silver and bronze services. He said they discuss that question often inside their firm. They want to be sure that their silver and bronze level services are competitive with other firms offering similar fees in their market. He was very clear that the important differences for the clients are:
– the probability the transaction will actually complete, and
– the price the company sells for.
Intrigued, I asked if he had a gut feeling for how different the prices and probabilities are for their three levels of service. He admitted that it was very hard to be specific, because even a firm like his doesn’t have enough data to provide certainty about statistics.
His opinion was that the difference in the price received by the shareholders might be as much as plus or minus one-third.
He added that the differences in the probability of success are much larger.
As we finished up our conversation, I asked if his firm ever discussed their three tiered pricing structure and service levels with prospective clients. He looked a little surprised and said, “Of course not.” He then asked me to promise I’d never attribute our conversation to him.
I admire the strategy my friend’s firm has developed. They have done what most successful companies do – responded to market demand for different products. They are large enough to be able to offer a client everything from economy to top tier M&A advisory services. It all depends on what the client really wants.
Thinking about our conversation afterwards, I decided it all comes down to how important a particular exit transaction is to the shareholders. I supposed if the company is a small investment in a larger fund, a bronze or silver level service might seem to be a reasonable choice. But if it was a company that I’d invested years building, I can’t imagine wanting anything less than the gold level service.