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M&A Advisor Fees
This is an excerpt from my new book: Early Exits - Exit Strategies for Entrepreneurs and Angel Investors (But Maybe Not Venture Capitalists).
Several people have mentioned how much they appreciate this section of my book. It’s surprisingly difficult to get information about M&A advisor fees for exit transactions. Few professionals post their rates. I am not sure why this is, and even less sure that it makes sense in today’s hyper-connected world.
Part of the reason I am posting this excerpt is to gather more data.
M&A Advisor Fees and Transaction Size
M&A advisor and business broker fees increase with the size of the transaction, but not in direct proportion. The amount of work required to complete a larger exit can actually be less than that of a smaller transaction. Where this becomes interesting is at the smaller end of the transaction size range.
The professionals that do merger and acquisition (M&A) transactions fall into three rough categories:
- At the upper end of the range, there are the investment banks and accounting firms with teams devoted to M&A.
- In the middle range there are boutique firms that usually include three to seven professionals.
- At the smaller end of the transaction range, most exit transactions are performed by individuals or two to three person firms.
It’s much easier to understand the pricing mechanisms for exit transactions if you look at it from the perspective of the professionals doing the transactions. Very large firms have offices in downtown towers with real human receptionists and assistants. The boutique firms have smaller offices in less expensive buildings and have automated phone attendants and no assistants. The individual professionals answer their own phones.
For a transaction to make sense for the big firms with downtown offices, the total fees have to be in the $1 to 2 million range. For the boutique firms, the minimum fee size is in the $500,000 to $1 million range. Individual practitioners can afford to do exit transactions where the fees are only a few hundred thousand dollars.
Typically, the big firms will compete most aggressively for exit transactions above $100 million because these transactions will produce several million dollars in fees. The $20 to 75-million range is the optimum range for the boutique firms. Smaller transactions are usually done by individuals. These numbers shift up or down depending on how busy the firms are.
The standard M&A advisor fee model includes a work fee and a success fee. In some cases, it may also include a contingency or break fee.
M&A Advisor Work Fees
Work fees are paid by the company up front or, sometimes, monthly over the first four to six months. This covers the M&A Advisor's direct costs during the initial stages, as well as their contribution to the preparation of the selling documents and due diligence materials.
For larger transactions, the work fees are usually $100,000 or more. For boutique firms working on a $20 to 30-million exit transaction, the work fees are usually in the $50,000 to $75,000 range. At the lower end of the transaction spectrum the work fees don’t usually go below $50,000 because, no matter how small the transaction, there is still a fixed amount of early work that has to be done.
There are firms that will charge lower work fees, sometimes in the $30k to $40k range. Most use highly templated documents. Some firms - even on Wall Street - produce selling documents that are surprisingly inadequate.
It’s very unusual for a firm, or even an individual practitioner, to undertake an exit transaction without a work fee. Part of the reason is that anyone involved with exits has seen a situation where, at the time of the initial engagement, the shareholders and board are enthusiastic about an exit, but by the time an offer gets to the table the shareholders have reconsidered.
Often this happens precisely because the advisor or broker has done a good job, and has shown the current shareholders that the company is worth significantly more than they thought. This alone can often result in shareholders changing their minds and deciding to continue to own the company for a while longer.
The work fee is a fair way for the professionals to protect their initial investment in helping to facilitate a transaction. It is also a test of how serious the sellers are to actually sell the company.
M&A Advisor Success Fees
Success fees for exit transactions in the $10 to 30-million range are typically 4-6% of the final exit value. This means that the business broker who successfully completes a $25-million exit transaction will usually be paid a fee at closing of about $1 million.
For transactions over $100 million, I have heard of success fees that are in the 2-3% range. This means that a broker executing a $100 million exit will typically receive a success fee in the $2 to 3-million range.
Where success fees become more challenging is in the smaller size transactions because the amount of work required to execute a $5-million exit is not significantly less than the effort required for a $25-million exit. It takes just about as much manpower in either case and in some ways the smaller sizes are actually more work.
Why Smaller Transactions Are Often More Work Than Larger Ones
It can be even more difficult to sell a $5-million company than a $25-million company because the buyers for smaller companies tend to be either the junior people in the large company acquisition teams, or the CEOs and CFOs of medium-size companies. Their relatively lower experience levels, or lack of availability, means that these transactions often require more time from the advisor or brokers.
So even the smaller boutique firms will not usually want to undertake an exit transaction in which the selling price will be less than $10-million. Even at a 6% success fee, a $10 million transaction will only deliver a $600,000 success fee. This is approaching the minimum economic size that even the smaller firms can undertake.
This is why transactions in the $5 to $25-million range are often done by individuals who have developed expertise in this area.
Because of the amount of work involved in a $5-million transaction, the success fees are often in the 7-10% range.
While the amount of work required to perform exit transactions is similar whether the company is valued at $5 million or $100 million, the fees for large brokerage houses are higher due to their overhead and prestige.
Please Share Your Data
I'd appreciate hearing from you about your experiences with M&A Advisor fees. The only way I have been able to aggregate this information is by asking CEOs, board members, investors and M&A advisors that I meet. If you have a data point you can share, please either leave a comment below or email me directly.
