Selling a company of any size requires careful planning and ideally, assistance from an M & A advisory firm with experience on the seller’s side of the negotiating table. It’s the best way to make an advantageous deal.
At NorthStar Venture Partners, we’ve been on the seller’s side of negotiations as well as the buyer’s side. One of the biggest decisions you’ll make as a seller is choosing an M & A advisory firm. But how much will it cost?
There are multiple fees that may be associated with an M&A transaction, including an upfront fee and a success fee -- each of which may be structured in a variety of ways. Some advisory firms may charge an initial engagement fee as well. Here are 4 types of fees you’ll pay in M & A advisory.
#1: Commitment/Engagement Fee
The first M & A advisory fee you should know about is the commitment fee, which is sometimes referred to as an engagement fee. The engagement fee is designed to ensure that the company being sold has skin in the game -- meaning that they’re committed to making a deal happen.
Commitment fees may range from $10,000 up to $25,000 or more. These fees are typically non-refundable. This money allows the M&A advisory firm to cover the costs involved in preparing the company for sale and positioning it for maximum enterprise value.
#2: Monthly Retainer
It is no secret that selling a company takes both time and money. For that reason, it is common for M & A advisory firms to charge their clients a monthly retainer that covers part -- but usually not all -- of the expenses of marketing, negotiating and finalizing a deal.
The amount of a monthly retainer will depend on the size of the potential deal, but it is most commonly negotiated as a flat amount to be paid each month. The range may start as low as $2,500 and go up to $15,000 or more. There may be some wiggle room for negotiation, but you should be prepared to pay a monthly retainer until you arrive at a deal.
#3: Success Fee
The success fee is the fee that you’ll pay when a deal is complete and money changes hands for the sale of your company. The fee structure should be disclosed up front, so there are no surprises when you make a deal.
There are three potential fee structures for the success fee. Here they are:
- The flat fee. A flat fee is just what it sounds like: a fixed percentage of the sales price that you will pay when your company is sold. The fee is usually between 2% and 8% of the final sales price although some firms charge more than that.
- The tiered structure. A tiered structure is designed to reward M & A advisory firms who negotiate advantageous deals for their clients. They typically start with a percentage that applies up to a specified threshold. The percentage then increases on subsequent tiers. The higher percentage is only paid if the deal justifies it.
- The Lehman structure. While the Lehman structure has fallen somewhat out of favor, it is still used by some M & A advisory firms. It offers a decelerating fee schedule where the last million dollars (or whatever increment is described in the contract) pays a lower percentage than the first million.
Make sure that you understand the structure of the success fee before you sign a contract with any M & A advisory firm. Keep in mind that the costs associated with putting together a small deal are not substantially less than they are to negotiate a large one. For that reason, some M & A firms may charge a higher percentage on small deals.
The final information you need about success fees is that they typically range from 2% to 8% of the sale price. Some M & A firms have a minimum success fee -- which, as noted above, may lead to a higher percentage being charged for smaller deals than for larger ones.
#4: Break Fee
The final type of fee you should know about is one that is not used frequently. That said, it may come up in negotiations and you should be aware of it. It’s called a break fee.
The break fee is a fee that you are required to pay to some M & A advisory firms if they work with a potential buyer to negotiate, the buyer makes an offer, and you decline it. The purpose of the break fee is to help the M & A advisory firm recoup the expenses incurred during the deal negotiations.
M & A advisory fees can seem high when you’re considering a deal that is only hypothetical. However, it’s essential to remember that a good M&A advisory firm can pay for itself many times over by helping you to avoid pitfalls common in the M&A process, help you attract buyers, negotiate the possible deal for you & your company, and assist you during the transitional period after the sale.
Do you need an M & A advisor for your company? Book a call with NorthStar Venture Partners today!