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Back to blog June 18, 2009 No Comments Author: Andy Jones

Investment Banking – Fees

In selecting a Merger & Acquisition advisor, also referred to as an investment banker, the Seller will sign a negotiable engagement letter outlining the fee structure, the service to be provided, and other general terms of agreement.

The M&A Advisor’s fee structure includes a success fee and often a retainer fee and an expense reimbursement fee as well. The inclusion or exclusion of these three components will vary, depending on the investment bank, the deal size and the particular client.

Bulge bracket firms negotiating deals valued in the $75 million+ range will likely charge all three fees. Whereas the middle market firms and business brokers negotiating somewhat smaller deals will focus primarily on the success fee. In either case, the bulk of an M&A Advisor’s compensation is in the success fee.

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 transaction closing. Thus, if the deal does not close, the advisor does not get paid (much).

The success fee may further be determined according to the various Lehman Formulas (i.e. single, double and triple) where an initial percentage of the EV is charged for a minimum sales price and a lower, de-escalating, percentage is charged on amount levels exceeding that minimum.

This structure can also be adapted to escalating percentages which can be an even stronger motivator for the M&A Advisor to fight for the best closing terms possible.

For smaller deals, $20 million and lower, some (but not many) brokers and bankers may opt to charge a simple flat fee or according to their own self-prescribed tiered fee structure.

Retainer Fee
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 EV or a flat fee due up-front. Some firms may even schedule multiple retainer fee payments into the future that align with progress. As with the success fee, this component is also 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, thus the necessity to travel, the more likely expenses will accumulate.