M&A advisory fee structures

Apr 3, 2024

The fee structure between an M&A advisor and a founder is crucial for creating aligned incentives, which drive positive outcomes for both parties. Misaligned incentives can lead to suboptimal results such as the founder “leaving money on the table”.

When considering a fee structure, founders should focus on two key financial aspects: the retainer fee and the success fee.

Retainer Fee:

  • A fixed, one-time retainer fee at the beginning of the engagement may be considered more desirable by founders. This engagement is typically perpetual but can be terminated by the seller at any time.

  • Some M&A advisors charge an ongoing monthly retainer fee, which may incentivize them to prolong the engagement unnecessarily. To avoid the appearance of a conflict of interest, advisors often charge a low symbolic retainer and use it simply to filter out unserious sellers.

Success Fee:

  • Represented as a percentage of the transaction value, success fees align the incentives of the founder and the advisor.

  • The higher the deal size, the greater the reward for both parties.

  • Success fees for minority transactions are typicallynot based on valuation to avoid misalignment.

  • Banks may not publish standard rates, as different companies have different paths to optimal valuation.

  • Before quoting a success fee, banks evaluate the business, identify the path to optimal valuation, and structure fees based on the resources required.

  • Founders should be cautious of minimum success fees, as they can create misalignment by incentivizing banks to settle for a lower outcome.

  • Performance-based ratchets, where the success fee increases as valuation milestones are achieved, help maintain alignment as valuation and risk increase.

Ultimately, an investment bank will earn its fees by increasing a company's enterprise value through a structured, competitive process. When incentives are aligned and the opportunity to exit is realistic, both the founder and the banker can benefit from an appropriate fee structure.

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