Information about M&A advisor fees for selling a business is surprisingly difficult to find. I’m not sure why other M&A professionals are 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.
This is an updated excerpt from: Early Exits – Exit Strategies for Entrepreneurs and Angel Investors (But Maybe Not Venture Capitalists).
Since the first version of this post in 2009 there have been a few other posts on M&A fees. Some of the good ones are linked below.
I hope you’ll share your experiences on fees, or other good links, by commenting below.
Update January 2013
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.
Because the data is so sparse, changes in fees over time are even more difficult to determine.
As we slowly recover from the mortgage crisis and continue to work in an environment where we have the lowest cost of capital in our lifetimes, I am seeing two recent trends in M&A advisory fees:
1. An increase in success fees of 1 to 2% (of total transaction size), and
2. “Minimum fees” are becoming more common
M&A Advisor Fees and Transaction Size
M&A Advisor 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 professionals that sell businesses fall into three rough categories:
- At the upper end of the range there are the big investment banks and accounting firms with teams devoted to M&A.
- In the middle are mid-sized firms that usually include three to seven professionals, usually called M&A Advisors.
- At the smaller end of the transaction range, most businesses are sold by boutique, one to three person 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 a few 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 specialized boutique firms. These numbers shift up or down depending on how busy the firms are.
The standard M&A Advisor fee model includes a work fee and a success fee. In some cases, it may also include a contingency or break fee.
The Lehman Formula 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. 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 Up Front 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 exit 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 are usually in the 2 to 3% range. This means that a firm executing a $100 million exit will typically receive a success fee in the $2 to 3-million range.
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.
In 2013, I am 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 are saying 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 minimum?
(If you are looking at an M&A engagement agreement and this doesn’t make sense to you yet, please contact me below.)
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 smaller 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 Good 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.