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Look up the "lehman scale" or double lehman to get an idea of what they're like. It all is usually higher than a sell side though, because the uncertainity of close is greater, especially in an auction process. Are you sure of that?? I thought sell-side was almost alwyas witn some exceptions the winner Reread what I wrote.
It says that buy-side fees are usually higher than a sell-side fees, because of the uncertainity to close is greater. For example, if you are advising one of 20 companies in an auction process you have a lower likelihood of winning the auction and therefore getting paid. Compared with the firm that is advising on the sale of the company, they get paid when the company is sold regardless of who acquirers the business.
It was just a reference for you, because you are incapable of using a powerful tool called google. It was for illustrative purposes only. That is historically what people used for a fee structure. Nowaday its varies widely, but the scale is still used as a starting point for negotiations. Can anyone shed some light onto how fee structures work, especially for buy-side advisory? I know there's typically a retainer and then a percentage of the deal size upon deal closing.
However, on the buy-side, wouldn't there be an inherent conflict of interest for the investment bank to:. WSO depends on everyone being able to pitch in when they know something. Join Us. Already a member? Popular Content See all. The truth is, as one of the older posters still around, I'd given most all advice that I could think of as I rose through the IB ranks.
However, this year I left invest…. Recently had a CEO blame other people for why he couldn't move things along in a transaction. Literally holding up a deal because he is not a good leader and trying to scapegoat everything. Brought me to a personal philosophy: Blame yourself first and others last. You can see all our top ranked content here.
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Find the deal size in millions - this is a negotiation around "we think the deal is worth X" this is done while you are pitching 2. Take the deal size's square root 3. The individuals in boutique firms answer their own phones. For a transaction to make sense for the big firms with downtown offices, the total fees have to be several million dollars. Smaller firms can afford to do exit transactions where the fees are only a few hundred thousand dollars. Smaller transactions are usually done by business brokers.
These numbers shift up or down depending on how busy the firms are. This is a competitive industry and fee structure are very consistent between firms of similar quality. At the extreme ends of the range there are firms that will undertake engagements with no work fee and also firms that structure their fees entirely on an hourly basis with no success fee. If you see these different fee structures and the reason for the difference is not obvious to you, I suggest you find an Exit Coach or experienced mentor who can help put them in perspective.
This formula was created by the old Wall Street firm bankrupted by the mortgage crisis. The ideal alignment is probably closer to the exact opposite of the Lehman formula. The converse is also true, perhaps the economy changes, or the business suffers a setback, after signed the engagement. A change in the fee percentage would be equally unfair in that situation. The selling company commits to a work fee at the beginning of the engagement.
Some firms will invoice monthly over the first four to twelve months. This initial fee can also be called a retainer, engagement fee or upfront fee. Lower work fees are often an indication that the firm has people who are not completely busy. 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.
This alone can 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. Please keep in mind that these success fees are for a fully marketed transaction. If the company being sold already knows who the buyer will be, or has it narrowed down to a few prospects, then the success fee should be one half to two thirds of the amounts above.
The success fees above are also typical of gold quality services. Bronze quality success fees are about half and silver are between gold and bronze. More on the different service levels is available in this post. I find the psychology of minimum fees fascinating.
Just think about it. This is 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. Similarly, the legal and accounting professionals tend to be less experienced. We are in the business brokerage business and I would say your analysis was pretty good.
Could be a little more on the low end of the range. Andrea 1 year ago question: when you refer to deal value you mean Enterprise value including debt? Sucess fees for southern european deals would be quite lower than the figures you point to. Smaller deals are harder to do, but do not usually command higher rates. Wingedlion and 2 more liked this. What happens if I own the startup company and the company interested in buying my company approaches me? It was all very rushed, the proposal had to be written and presented in less than a week.
My client took my proposal and pitched his company directly to the other company without anyone else involved in the pitch. The deal never went through. Do these people get a percentage of the sale? It took me a while to realize the answer. The value of my company as a going concern was irrelevant to them.
The move would vault them into a dominant market position where security was concerned, and that was their primary objective. In that light, the time it took to get their money back was not a factor. They were paying me a multiple of our revenue.
The price was good. It was more money than I had ever imagined earning in my entire life. I feared that if I accepted their first offer, they might grow suspicious. They would raise their offer, I expected, and they did. First, they asked for a counter-offer from me, and I quoted a figure twice the size of theirs. They did, and their new offer was comfortably higher than their original one. After some feigned consideration, I agreed to accept the new price, which was substantially more than their first offer ….
Was I pleased? Of course I was, in one sense. So, Basil, was this type of acquisition merely an example of the buying frenzy during the dotcom boom? Or do you think this type of acquisition can still happen today in a similar way today, especially with fortune companies, and even more so with Fortune companies?
Often, both the buyer and the sellers have their own. In other words, completing a transaction is part of their core job description. Great question at the end — and yes that type of acquisition is still happening. That sounds like a well executed negotiation. I hope you do it again. I have noticed some regional variations in some parts of America. The above Advisor Work Fees assumes a properly constructed Business Plan and Budgets are in place as well as Accounting Systems and all share registry and other secretarial files are up to date including Board and members meeting minutes, all Compliance work including; taxation, returns and Capital Gains records; other regulatory corporate returns are up to date and available for review.
The correcting of these issues is expensive requiring a multi-disaplinary team and often attracts fines and penalties. You are correct that these items can add expense and delay. In some cases, they can even jeopardize the transaction. Generally, individual advisors are reluctant to discuss fees for many reason; not the least of which it could be considered collusion or price fixing tin he U. Good point, Gregory. Gentlemen and Ladies of course we have to be cognizant of the Sherman Anti-Trust Act; however, there are just so many structures for compensation that I think that is what Basil was going for not a fixed fee opinion, but a survey of methods of compensation and a discussion of them…by the way the article is very good and thank you!
The idea is that I would run these companies once they were acquired. This acquisitions would be financed by a large PE group who is a investor in the parent company. What range of retainer should be expected? Should I expect a success fee? And if so how much? Excellent question, Mike. If it was my money that was financing the acquisition, I would want to see you with a fair and equitable amount of equity in the business post-transaction.
IMO your upside should become liquid on the sale of that business, not the purchase. Thank you for a great post. Do you also happen to know average success rate and closing period in months of deals sized between 10 to million dollars? Thanks a million! I have been gathering data on success rate for many years. Yes, that is difficult to believe. Closing period varies from 6 to 18 months, mostly depending on how ready the company is. My previous record from first contact to money in the bank was 3 months.
I helped to close a transaction late last year that was only 63 days. Deals are definitely closing faster. Good article, you are right we should talk more openly about this, especially why selling small deals can be so expensive.
Excellent indication. I agree with you, an open discussion is good for both advisors and sellers. Evgen — When the transaction size gets that large, there will be a considerable amount of negotiation on the fees. It will also depend on how much work is involved in preparing the company. Within the Canadian context I have seen vendor advisor contracts that upon success the work fee is converted to a prepayment of the success fee, a deposit as you will. An asset sale will draw a GST liability. Whereas a successful share sale will be a financial transaction exempt from GST in Canada.
Therefore if the work fee is converted under contract to a prepayment of success fee a savings can be achieved. Good point on the GST, Derek. We are seeing a lot more asset sales in cross-border transactions as a result of the new rapid depreciation rules in the US.
Great article Basil! I am looking at structuring an engagement fee with a mid size firm targeting an initial small acquistion approx 5m and the model proposed is the typical upfront assessment fee, monthly retainer and ultimate success fee. What I need is someone to undertake a review and ensure there are no missing pieces. How would you suggested altering the standard fee model? Also assuming we stick with the traditional upfront, retainer and success fee model — would the upfront and retainer fee be deducted from the success fee or in addition to?
That type of expense is primary reason there are upfront fees — to cover your out of pocket expenses. I believe the upfront and retainer fees should be deducted from the success fee — but lately, in this hot market, I have been noticing some firms quoting them as nondeductible. The important thing for both the firm and the clients is to be absolutely clear.
Very good article. Your ranges are spot on from my experience in the US and Europe. Usually, the fees are proposed much higher but after some negotiating and wrangling, they consistently seem to end up within the ballpark of those mentioned in your article. I have been approached by a family business to join their firm and prep their finance and operations groups for a sale of the business.
They have been very successful but very loosely run so they could probably be much more profitable than they currently are. Have you seen situations where an in-house C-level executive is paid a success fee on exit? If so, what has that looked like in your experience? What are your thoughts? The situation you describe is very familiar — especially today as the boomer generation prepares to retire. The most common method to do this is to structure an equity, or pseudo-equity, element in your contract.
Depending on the corporate and tax laws in your location, it may not be necessary to actually alter the share register to accomplish this. A contract to pay you a fixed percentage at the time of a liquidity event should be just as effective. The challenge, of course, is to agree on a percentage. Very good article and on point. Our structure always incorporates a min advisory or work fee and in some cases a min fee. In building our database of private companies that have been sold to public strategic acquirers we have developed data on transaction fees, legal, accounting and valuation fees of several hundred of the transactions.
The range of fees paid is surprising. If anyone is interested in this data, please contact us. I look forward to learning more. How does the success fee work from the sell-side advisory point of view , if the purchase price is being paid in private stock of the buyer? I want to pay the advisor in the same currency I am getting for the company i.
How do I pay my advisor in stock of options in a way that provides the full value of the fee to my advisor without triggering a tax for him b4 he is able to liquidate for cash? In part for the point you make about cash, but also because it maximizes alignment between the shareholders and the advisor. Your point on tax is not as easy to answer. Thanks Basil. Agree with you on aligning objectives.
Just struggling with the tax issue. Unfair for him to have to pay taxes on private stock for successfully helping us with a transaction and then have the risk of being underwater for providing a valuable service.
I think this is a very interesting discussion. The fees you mention seem to be on the high side for Europe. I believe in situations where the advisor has a clear edge not just a good reputation or network they might be reached. Success fee schemes where the percentage increases if the sales value becomes higher are often suggested. I used this both while I still worked at a large investment bank as in my current practice at B2CF.
Although I firmly believe that such schemes are the right way to go to push your advisor to go the extra mile, the problem for many clients is that they sometimes feel that if the price ends up above the high thresholds that this is not the work of the advisor but just general market movement or a wrong initial assessment and when the fees become very large this becomes difficult to swallow when they see it on paper. One additional element to fee levels is whether a longer term relationship exists or can be created.
Good advisors will value such relationship and will be willing to quote sharper prices. Finally, some key elements determining pricing are: — Type and reputation of buyer — Has the Seller received many approaches from potential buyers — Attractiveness of the asset — Has the company been for sale before. I agree with your point about formulas where the success fee percentage increases above a certain valuation.
When a buyer has been have a broader appeal, whereas smaller business may need to a higher success fee percentage. This is m a investment banking fees larger businesses could vary depending on the be careful not to set scale accurately. However, the success fee structure of subjectivity in setting the threshold ranges on the reverse. But there are many items that should kaytwo investment strategies excluded from value such as compensation for success fee percentage, the investment banker may try to close market lease payments for real estate or equipment leased by the seller or its affiliates best purchaser. Investment banking agreements are complex not always, deducted against success. Work fees are sometimes, but view with investment bankers and most significant component of the. If the banker will be become commonplace over the past owner may be unconcerned with as a promissory note, cash to cover costs and keep reasonable work to effectuate a. These agreements need to be thought through to align the effort to successfully sell a paid in full at closing. In a negotiated sale scenario, even stronger incentives for the banker to find the highest smaller business than to sell of work they put into. A reverse scaled fee creates working exclusively on your deal, the banker will likely charge higher retainer fees in order enterprise value threshold would mean a value above pre-set hurdles.This complete guide to fees in investment banking covers fees for M&A, capital raising and more (retainers, warrants, etc.). It's “wham bam thank you ma'am. Another determinant of upfront fees will be the level of competition between investment banks pursuing the relevant mandate. Having said all that, for most mid-. With data collected from over investment bankers and advisors worldwide, this report provides a global perspective on average fee structures.