When hiring an investment banker, you want to align incentives between you and the M&A advisor. As simple as this sounds, there is a lot to consider in order to make this relationship work.
We value transparency in our business and therefore we have been very excited to participate in the 2021/2022 M&A fee study conducted by Firmex and provide expert commentary.
The report is an invaluable resource, both for M&A advisors and their clients, and produces very much-appreciated transparency in the market.
If you are new to engaging investment bankers, here are a few terms you should understand that are used in engagement letters:
- Retainer
An investment banking retainer is a fee charged by an investment bank to a client for ongoing advisory services. The retainer fee is typically used to cover the costs of the investment bank’s time and resources, including analysts, economists, and other professionals who provide advice on mergers and acquisitions (M&A), capital markets transactions, and other strategic decisions. The retainer fee may also be used to pay for access to the investment bank’s research, due diligence, and other services. Investment banking retainers are typically paid upfront and are non-refundable.
- Milestone fee
An alternative to retainer fees: milestone fees are payments made by a company to its investment bankers for achieving certain milestones in an M&A transaction. Milestone fees are not always paid out, and can be forfeited if the deal is not completed. If milestone fees are included in an investment banking engagement, they should be clearly stated in the engagement letter.
- Success fee
A success fee is a fee charged by an investment banker for successfully completing a transaction, such as an acquisition or merger. The fee is typically a percentage of the deal value and is paid by the client. Investment bankers often charge success fees in addition to their regular fees, which cover their time and expenses. Success fees can incentivize investment bankers to work harder on a transaction and get it done quickly. They can also provide a financial reward for successful negotiations. However, success fees can also create conflicts of interest, since investment bankers may be tempted to push for a deal that is not in the best interests of their clients. As a result, success fees are controversial and are negotiated on a case-by-case basis.
- Out-of-pocket expenses
Out of pocket expenses are those incurred by investment bankers in connection with their work on a particular transaction. These can include costs related to travel, entertainment, and other out-of-pocket items. While most out of pocket expenses are relatively small, they can add up, particularly in the case of larger transactions such as mergers and acquisitions. Investment bankers typically seek reimbursement from their clients for out-of-pocket expenses incurred in connection with a particular engagement. In some cases, clients may agree to reimburse these expenses upfront; in others, they may require the investment banker to submit an itemized bill after the fact. Either way, out-of-pocket expenses are an important part of any investment banking engagement.
If you are interested to learn more, you can download the report here for free.
Understanding M&A Advisor Fee Structures: How to Get the Best Outcomes for Your Business
Why you should hire an M&A advisor
Working with an M&A advisor is essential for navigating complex transactions and aligning incentives. An experienced advisor brings expertise and helps structure the deal in a way that benefits both parties. Key to this relationship are the different types of fees, such as retainers, milestone fees, and success fees. A retainer ensures the M&A advisor has the resources to dedicate to your business, while milestone fees tie compensation to specific achievements, ensuring alignment of interests. Success fees incentivize the M&A advisor to achieve the best deal, though they should be negotiated carefully to avoid potential conflicts of interest. Understanding these fee structures is crucial to ensuring that both parties are aligned and working toward the best outcome for your business.
About Aventis Advisors
Aventis Advisors is an M&A advisor focusing on technology and growth companies. We believe the world would be better off with fewer (but better quality) M&A deals done at the right moment for the company and its owners. Our goal is to provide honest, insight-driven advice, clearly laying out all the options for our clients – including the one to keep the status quo.
Get in touch with us to discuss how much your business could be worth and how to maximize the valuation.
