Information about M&A advisor (investment banking) fees for selling a business is surprisingly difficult to find. I’m not sure why other M&A professionals are so reluctant to discuss fees and even less sure it makes sense in today’s online world. This is a current summary of the fees I’m seeing in the market.
There are no industry surveys or databases on M&A Advisory fees. The only ways I know to get information on fees is: to ask people directly, from similar posts to this one and from comments like the ones below. This is aggregate data that I’ve been accumulating for over a decade.
I hope you’ll share your experiences on fees, or other good references, by commenting below. Alternately, please email me directly – I will keep the source confidential.
Because the data is so sparse, changes in fees over time are even more difficult to accurately determine.
Since the update below in 2014, I’m continuing to see an increase in M&A Advisory fees. At the upper end of the range, success fees for $500 million transactions can now be as high as 4%.
The other significant difference is a dramatic increase in minimum fees (see below.) Minimum fees can now be as high as $5 million. I believe this is primarily driven by the fact that all of the good M&A advisors (investment bankers) are as busy as they want to be in 2016.
As we continue to recover from the mortgage crisis and continue to work in an environment where we have the lowest cost of capital in our lifetimes, I’m seeing two trends in M&A advisory fees over the past few years:
1. An increase in success fees of 1 to 2% (of total transaction size), and
2. “Minimum fees” are becoming more common
It’s Easy to Compare Fees but Much Harder to Compare What You’ll Get
Selecting the best M&A advisor to sell your company is one of the most critically important decisions a CEO or board will make during the company’s entire lifespan. It is also one of the most difficult decisions to make because it’s impossible to do an objective comparison between advisory firms.
For example, the most important criteria to consider when selecting your M&A advisor is the probability that they will actually sell your company. That may seem surprising – but the reality is that the probability of success varies over an almost unbelievable range. There aren’t any hard data or surveys on this, from what I have seen in the industry, the range looks like this:
I appreciate how difficult this will be for many people to believe. But I’m convinced that the probability of success varies from around 10% for low quality firms up to 75 or 80% for very high quality firms – and this independent of the company. In other words, if you hire a low quality firm, the chances could be as low as 10% that your company will actually end up being sold.
Also difficult to accept is the effect the firm will have on the price you’ll likely receive, which looks something like this:
Yes, the price you receive could easily vary over a range of plus or minus 50% depending on the quality of the firm you select.
Interestingly, the fees charged (above in light blue) vary over a much smaller range – presumably due to the competitive nature of the M&A advisory industry.
One important thing to keep in mind as you think about fees is the red lines on the graphic above. The red lines are the differences in the amount of cash the shareholders will likely end up with if they select a firm of different qualities.
Please also keep in mind that the amount of money received is a far less important consideration than the first graph above which illustrates the probability that the transaction will actually get completed.
Growth Strategy Consulting, Exit Planning and Mentoring- Included?
Another variable that is very difficult to compare between firms is the amount of Growth Strategy Consulting, Exit Planning, mentoring or coaching that is included in the fee. Some firms are willing to work with the company CEO for many months, and sometimes years, to increase the fundamental value of the business. Other firms believe their job is just to sell the business. These firms don’t include any significant work on helping the management team increase the value before the transaction.
To put this difference in perspective, firms that add a lot to the fundamental value probably invest about two man years of professional time in a typical exit. Firms that are more focus just on the transaction might put in one quarter to one half of that – around one half to one man year of senior time.
When the M&A advisor and the company expect that there will be a considerable amount of professional time applied to increasing the fundamental value of the business, the there’s usually an increase in the fees paid on a monthly basis. Some part of these monthly fees are typically not applied as a prepayment on the success fee.
M&A Advisor Fees and Firm Size
M&A advisor, investment banking and business broker fees increase with the size of the transaction, but not in direct proportion. Part of the reason is that the amount of work required to sell a larger business can actually be less than that to sell a smaller company. Where this becomes especially evident is at the smaller end of the transaction size range.
M&A firms (investment bankers) and business brokers can be categorized by size roughly as:
1. At the upper end of the range there are the big investment banks and accounting firms with multiple teams devoted to M&A.
2. In the middle are mid-sized firms that usually include three to seven professionals, usually called M&A Advisors.
3. At the smaller end of the transaction range, most businesses are sold by smaller firms usually called Business Brokers.
Understanding the pricing mechanisms for M&A fees is easier if you look at it from the perspective of the professionals doing the transactions. Very large firms have offices in downtown towers with human receptionists and assistants. The mid-sized firms have smaller offices in less expensive buildings, use automated phone answering and have no assistants. The individuals in boutique firms answer their own phones.
For a transaction to make sense for the big firms with downtown offices, the total fees have to be several million dollars. For the mid-sized firms, the minimum fee size is in the $500,000 to $1.5 million range. Smaller firms can afford to do exit transactions where the fees are only a few hundred thousand dollars.
Typically, the big firms will compete most aggressively for exit transactions above $100 million because these transactions will produce several million dollars in fees. The $10 to $50 million range is the optimum range for the mid-sized firms. Smaller transactions are usually done by business brokers. These numbers shift up or down depending on how busy the firms are. This post describes the differences between M&A advisors and business brokers in more detail.
The standard M&A advisor fee model includes a work fee and a success fee.
This is a competitive industry and fee structure are very consistent between firms of similar quality. At the extreme ends of the range there are firms that will undertake engagements with no work fee and also firms that structure their fees entirely on an hourly basis with no success fee. If you see these different fee structures and the reason for the difference is not obvious to you, I suggest you find an Exit Coach or experienced mentor who can help put them in perspective. This post on M&A advisory service quality may also be helpful.
The Lehman Formula, Accelerators and Ideal Fee Alignment
Some M&A firms still base their M&A fees on the Lehman formula. This formula was created by the old Wall Street firm bankrupted by the mortgage crisis. The formula was originally used for financing engagements, but somehow also came to be applied to M&A transactions.
If you think about it for a few minutes, I think it’s pretty obvious that a simple linear percentage creates much better alignment between the M&A advisor and the Shareholders.
The ideal alignment is probably closer to the exact opposite of the Lehman formula. Ideally, the M&A firm would be paid a larger percentage of the last million than the first million. This is often called an “accelerator.” The main reason this is not more popular is the difficulty of accurately predicting the fair value of the company at the time the transaction completes often a year or more later.
For example, think about a situation where the company’s value goes up unexpectedly due to a change in their market, a very large contract or some technical innovation after the M&A engagement is signed. Would it be fair for the M&A advisor to have a much larger fee because of something they had nothing to do with? The converse is also true, perhaps the economy changes, or the business suffers a setback, after signed the engagement. A change in the fee percentage would be equally unfair in that situation. For this reason, almost all M&A fees are straight linear percentages of the final selling price.
M&A Advisor Work Fees, Retainers or Engagement Fees
The selling company commits to a work fee at the beginning of the engagement. Some firms will invoice monthly over the first four to twelve months. This initial fee can also be called a retainer, engagement fee or upfront fee. This covers the M&A advisor’s direct costs during the initial stages, as well as their contribution to the preparation of the selling documents and due diligence materials.
For larger transactions, the work fees are usually $100,000 or more. For boutique firms working on a $20 to 30 million transaction, the work fees are usually in the $50,000 to $75,000 range. At the lower end of the transaction spectrum the work fees don’t usually go below $50,000 because no matter how small the transaction, there is still a fixed amount of early work that has to be done.
There are firms that will charge lower work fees, sometimes in the $30k to $40k range. Lower work fees are often an indication that the firm has people who are not completely busy. For that reason, lower work fees are also more common when the M&A market is not very active.
Interestingly, firms that work on transactions valued under $5 million – usually called “business brokers” often do not charge a work fee.
It’s very unusual for an M&A advisor to undertake an exit transaction without a work fee. Part of the reason is that anyone involved with exits has seen a situation where, at the time of the initial engagement, the shareholders and board are enthusiastic about an exit; but by the time an offer gets to the table the shareholders have reconsidered. This can happen precisely because the M&A advisor has done a good job, and has shown the current shareholders that the company is worth more than they thought. This alone can result in shareholders changing their minds and deciding to continue to own the company for a while longer.
The work fee is a fair way for the professionals to protect their initial investment in helping to facilitate a transaction. It is also a test of how serious the sellers are to actually sell the company.
M&A Advisor Success Fees
Success fees for selling a business in the $10 to 30-million range are typically 6 to 8% of the final value. This means that the M&A firm that successfully completes a $25-million exit transaction will usually be paid a fee at closing of about $1.5 to 2.0 million.
For transactions over $100 million, success fees had been in the 2 to 4% range. This means that a firm executing a $100 million exit will typically receive a success fee in the $2 to 4 million range. For a $500 million exit, fees in the 2000’s were 1% – 2% range, By 2016 fees for transactions as large as $500 million had increased to 3 to 4% (see Update 2016 above).
Where success fees become more challenging is 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.
Please keep in mind that these success fees are for a fully marketed transaction. If the company being sold already knows who the buyer will be, or has it narrowed down to a few prospects, then the success fee should be one half to two thirds of the amounts above.
The success fees above are also typical of gold quality services. Bronze quality success fees are about half and silver are between gold and bronze. More on the different service levels is available in this post.
For a typical transaction in the $20 to 30 million range, the success fees vs M&A service quality and engagement scope looks something like this:
In 2014, I’m seeing minimum fees being charged much more often. This clause in the engagement contract specifies the smallest amount the M&A firm will be paid if a transaction is completed.
I find the psychology of minimum fees fascinating. In my experience, most advisors don’t ask themselves what they’re conveying to the customer.
Just think about it. If the discussions between the M&A advisor and their prospective client have been open and realistic, why would the engagement agreement need to include a significant minimum beyond the work fee?
(If you are looking at an M&A engagement agreement and this doesn’t make sense to you yet, I suggest you find an Exit Coach or experienced mentor. You can also post a comment below and I’ll be pleased to help.)
Why Smaller Transactions Are Often More Work Than Larger Ones
Selling a $5-million company can be more difficult than selling a $25-million company. This is because the buyers for smaller companies tend to be either the junior people in the large company acquisition teams, or the CEOs and CFOs of medium-size companies. Similarly, the legal and accounting professionals tend to be less experienced. Combined, these relatively lower experience levels, and reduced availability, means that smaller transactions often require significantly more time and effort from the M&A advisor.
Even the smaller, boutique M&A firms will not usually want to undertake an exit transaction in which the selling price will be less than $ 5 million. Even at a 10% success fee, a $5 million transaction will only deliver a $500,000 success fee. This is approaching the minimum economic size that even the smallest M&A advisory firms can undertake.
This is why transactions below the $5 million threshold are often done by business brokers or individuals who have developed expertise in this area.
Because of the amount of work involved in a $5 million transaction, the success fees are usually in the 10 to 12% range.
While the amount of work required to perform exit transactions is similar whether the company is valued at $5 million or $100 million, the fees for large firmsare higher due to their overhead and perceived prestige.
Other Posts on M&A Fees
These are some of the other good posts on M&A fees:
Please Share Your Data and Links
I’d appreciate hearing from you about your experiences with M&A advisor fees. The only way I have been able to aggregate this information is by asking CEOs, board members, investors and M&A advisors that I meet. If you have a data point you can share, or another good link on M&A fees, please either leave a comment below or email me directly.