When considering a sale of your business, one of the most important decisions you’ll make is who to work with as your M&A advisor and how to align your interests with those of your investment bankers.

Investment banking fees and their structure will significantly impact how much money you walk away with after the transaction is complete. In this article, we’ll discuss the different types of fees M&A advisors typically charge and how to ensure you get the best outcomes for your business.

M&A advisors typically charge two types of fees: retainers and success fees. Retainers are a flat fee that is paid upfront, regardless of whether or not the transaction is successful. Success fees are typically agreed upon as a percentage of the final sale price and are only paid if the transaction is completed successfully.

Retainer fee and success fee comparison

Retainers as a part of M&A fees paid to an advisor

M&A advisory projects typically involve a great deal of coordination and communication between the parties involved. In order to ensure that all of the necessary steps are taken in a timely manner, M&A advisors typically charge a retainer fee.

This fee is usually paid monthly and allows the M&A advisor to allocate the resources necessary to properly manage the project. Retainer fees exist also to provide the M&A adviser with some financial security in case the project is unexpectedly delayed or canceled.

The level of the retainer will vary depending on the size and complexity of the transaction. The retainer fee is used to cover the costs of the advisor’s time and expertise and is typically non-refundable. Retainer fees are an essential part of M&A deals and help ensure both sides are committed to completing the transaction.

Occasionally, you may encounter M&A advisors that do not charge fixed advisory fees. It may appeal to you as a business owner. Still, for an investment bank to provide a level of services that is adequate in a typical sale process, you should expect some upfront expense. Ultimately, it is a win-win situation to because both parties show that their commitment to working together.

Milestone fees as a substitute for retainer fees

Some investment banks may offer to substitute retainer fees with milestone fees.

Milestone fees are payments made at specific points when reaching certain stages of the sale process. For example, a milestone fee may be paid upon signing of the LOI, completion of due diligence, or when a draft purchase agreement is delivered.

Milestone fees can be a helpful way to align the incentives of the advisory team with the client’s objectives. They also provide a way to structure the project so that progress can be measured and verifiable deliverables are produced.

However, it is essential to carefully consider the appropriate fee structure before agreeing to it. Make sure you understand what deliverables are expected at each milestone, and that the fee is commensurate with the value of the deliverable. Otherwise, you may find yourself paying for something that doesn’t provide much value to your M&A project.

M&A Fees: Retainer and Milestone models

Success fee – what to expect?

Success fees are the largest source of compensation for investment bankers and usually make up the majority of their income. This fee is typically a percentage of the total value of the transaction and is paid out only if the deal is completed.

M&A projects can be highly complex and often involve a great deal of financial risk for the investment bank. If a deal falls through, the M&A firm will not receive any compensation for its work. As a result, M&A firms typically only take on deals they believe have a high chance of success or that offer very high fees in the event of the deal closing.

The level of success fees varies depending on the advisor but is usually a few percent of the total transaction value or enterprise value. In some cases, M&A advisors will deduct their retainer from their success fee. You should be aware of this when negotiating fee structures, as it can significantly impact how much money you end up paying your advisor.

Many advisors will also expect a minimum level of the success fee, irrespective of the outcome of the transaction.

Success fee structure – how to maximize your gains

Success fees that increase above a certain company valuation threshold make a lot of sense from the point of view of value maximization. M&A advisors are typically paid a lower percentage of the sale price if the valuation is below this threshold and higher if it is above. This incentivizes M&A advisors to get the best possible price for your business, as they will make substantially more money if they can negotiate a higher sale price.

Success fees for capital raising

M&A success fees are different from capital raising fees. This fee is typically based on a percentage of the capital raised and can vary depending on the complexity of the capital raising process and the amount of capital raised.

Other M&A fees

In addition to M&A advisors’ fees, you will most likely also incur fees from other professional services firms: legal advisors, tax advisors, and accountants. These fees can add up quickly, so it is vital to be aware of them in advance. Unlike M&A advisor fees, they are rarely contingent. Lawyers typically charge by the hour, with a cap. Tax advisors may also charge by the hour or have a fixed price. Accountants usually have a fixed budget or charge by the hour. M&A advisory fees vary depending on the size and complexity of the deal, so it is essential to get an estimate from your advisors and consultants beforehand.

Engaging an investment banker

When hiring an investment banker, you may be inclined to negotiate the lowest possible fees. However, this may not be in your best interest. Investment bankers with niche expertise or strong relationships with the most likely buyers can add value to your business. They can help you get a higher price for your business and sell it faster. The success fee is typically a percentage of the sale price, so you will still come out ahead even if you are paying a higher fee.

When engaging an M&A advisor, consider their experience, success rate, drive to get the deal done as well as the fees and choose the one that is most likely to get you the best result.

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Understanding M&A advisor fee structures is an important part of ensuring that you get the best possible outcome for your business. By aligning your interests with those of your M&A advisor, you can make sure that the sale process is smooth and successful.

M&A advisor fee structures can seem complex, but understanding the basics will help you make sure you’re getting the best possible outcome for your business. If you plan on selling a business, have any questions about M&A advisor fees, or want to learn more about how we can help you sell your business, get in touch with us. We would be happy to answer any of your questions.