As a buyer or seller, you can expect these three types of costs:
WORK FEES: These also are called retainer fees, up-front fees, and/or engagement fees. These fees cover costs during the buy/sell process and can be charged in one lump sum or on a monthly basis. Costs can include research on potential buyers/sellers, investigations into raising capital via various funding paths, developing marketing and sales campaigns, covering costs of phone campaigns, etc. to name a few.
Work fees also help guarantee a commitment from you and your investment bank. Optimally, monthly work fees are what you want. Paying money out monthly ensures you stay focused on the task at hand. Plus, the investment banking firm stays focused because they need to earn their keep each month. In short, this fee amounts to “skin in the game” for both.
- Respondents to the 2018-2019 M&A Fee Guide research report from divestopedia and FIRMEX were split in how they charge work fees—45 percent lump sum and 42 percent monthly.
- If lump sum, 55 percent of respondents indicate their work fees were $15K and above; 19 percent were between $10K and $15K; and 21 percent were between $5K and $10K.
- If monthly, 19 percent indicate their work fees were $15K and above; 22 percent were between $10K and $15K; and 41 percent were between $5K and $10K.
FOCUS charges work fees on a monthly basis. We feel it better aligns us with our clients as we need to prove up month after month on their behalf. Monthly fees also reduce the “am I getting my money’s worth” concern as each month is associated with a set of deliverables. We generally average $8K-$10K in monthly work fees—a typical transaction lasts somewhere between 6-8 months.
SUCCESS FEES: These are the fees charged for successfully closing a transaction. Of respondents in the M&A Fee Guide, 42 percent charge some sort of scaled success fee and 40 percent charge a fixed percentage while 18 percent charge based on the Lehman model or a variation of that model (a tiered fee structure that reduces with each successive dollar amount).
What factors determine the size of success fees? “Simple” and “large” generally are the main factors that reduce the amount of the success fee.
- With complexity comes more time spent on all factors and phases—and, with more time comes higher fees.
- Most M&A teams will reduce their success fee percentage as the deal size increases. This is especially true in the large company arena as deals reach into the multi-millions.
According to the research report respondents, top factors to consider when proposing a success fee percentage are:
- Deal size—31 percent
- Complexity of the transaction—24 percent
- Riskiness in closing the transaction—22 percent
EXPENSE REIMBURSEMENT: These expenses—incurred during the transaction—get reimbursed by the client versus being “value add” costs that are a part of the advisory services. In the 2018-2019 M&A Fee Guide research report* the following were listed by the respondents as expenses they would pass along to the client:
- Travel and accommodations—50 percent
- Data room—23 percent
- Printing and material costs—16 percent
To get a copy of the full survey, go to: https://www.firmex.com/resources/