The fees charged for sell-side M&A by investment bankers vary from deal to deal. Every deal typically includes some type of up-front engagement fee either paid in a lump sum or on a monthly engagement or retainer. Most of an investment banker’s fee (and your cost) is couched in the back-end success fee. In some cases the success fee may be discounted by the amount paid in the engagement or retainer fee, but not always. One thing is for certain, fees for doing deals are always negotiable. What you pay on both the front and back of your deal will be dependent on the following components:
- Deal Size. The bigger you are, the less you will pay on a per dollar basis. Smaller deals tend to pay more per dollar.
- Deal Preparation. The more prepared you are, the less you are likely to pay, especially as it relates to engagement fees.
- Negotiation. You are free to always negotiate fees when hiring an ibanker, but as is often true you get what you pay for.
Front End Fees
Engagements can range from a few thousand dollars a month to six figures. Most of the deals we do include up-front fees that range from $10K to $50K. Sometimes they are paid monthly, sometimes they are paid upon execution of an Investment Banking Agreement. Sometimes they are discounted against the success at close, sometimes not. Truly qualified investment bankers are unlikely to work on any deal without taking an upfront fee. Contingency-only deals on legitimate sell-side engagements are typically non-existent. You can expect to pay something up front to prepare your business for sale and start the marketing.
There are many ways to skin the success fee cat. First, understand how the sell-side investment banker is going to structure his fee. If s/he uses the Lehman method, expect to pay:
- 10% for the first $M
- 8% for the second $M
- 6% for the third $M
- 4% for the remaining $
The Lehman method is typically used on smaller transactions with values <$10M. I personally rarely use it.
In many cases such deals may also see a flat rate fee (say 6%) for anything less than $XXM. Some investment bankers may have minimum fees that preclude them from working a deal with a valuation <$XXM. In such cases, they are likely to rarely use the Lehman method and may use a flat rate formula or a more aligned method that looks incentivizes all parties toward the same eng-goal. The aligned method typically looks something like this the following:
The following link includes my typical Aligned Fee Calculator when computing what to charge for various deals. I will adjust thing down for size, depending on the deal. This incents the investment banker to push the value of the deal higher. Hence, the fee structure is more “aligned” between the seller and his/her intermediary.
When trying to understand what you will eventually pay, it is helpful to take the following reverse-engineered process.
- Figure out what your business is worth, not in a best case, but in a normal range of comparables within your niche and size
- Figure out the blended rate based on previous considerations
- Calculate what you will pay based on front end and back end fees
Expect to pay a blended rate from 2% to 8% when it comes time to sell your business. The bigger you are, the closer to the bottom of that range you will be.
I have also not included potential travel, legal/attorney cost, which can tack on another 1% or more to the deal. That’s likely a discussion for another day.
Too simple for you? Sorry, I’m a simpleton. That’s how I roll.