Merger & Acquisition advisory firms, also referred to as investment banks, retain new clients with a negotiable engagement letter that outlines the services to be provided, the fee structure and other general terms of agreement. This article presents an overview of the three most common components of an M&A advisor’s fee structure:
* Retainer fee
* Success fee
* Expense reimbursement fee
The inclusion or exclusion of these three components will vary, depending on the investment bank, the deal size and the particular client. For example, bulge bracket investment banks negotiating deals valued in excess of $100 million (enterprise value) will likely have a fee structure that involves all three components. Middle market investment banks’ fee structure may include all three components, but often the expense reimbursement fee is the first to be negotiated out of the contract. And for smaller middle market deals, it’s not uncommon for the up-front fee to be creditable to the success fee or waived altogether. Business brokers negotiating somewhat smaller deals will usually only include a success fee. In all cases, the bulk of an M&A advisor’s compensation is in the success fee.
The primary fee, the success fee, is typically a percentage of the enterprise value (EV) of the company for sale and contingent on a successful transaction. Thus, if the deal doesn’t close, the advisor does not get paid their primary fee.
The success fee may further be determined according to the traditional Lehman scale (i.e. single, double and triple) and other similar formulas where an initial percentage of the enterprise value is charged for a minimum sales price and a lower, descending percentage is charged on amounts exceeding that minimum. This structure can also be adapted to escalating percentages, which can provide stronger incentives for the M&A advisor to negotiate the best closing terms possible.
The amount of the retainer fee charged is also dependent on the size and complexity of the deal. The initial retainer fee can be a percentage of the enterprise value but is usually presented as a flat, up-front fee. Some firms schedule a series of retainer fee payments associated with pre-defined deal milestones. The retainer fee is normally very negotiable.
Expense Reimbursement Fee
The expense reimbursement fee would include any out-of-pocket expenses for travel and other ancillary costs incurred by the M&A advisor working to close the transaction. The larger the transaction size, the more likely expenses will accumulate.
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