There isn’t a lot, if any hard data out there for how fees have changed overtime or there is any meaningful positive correlation to success rates.
In general, the higher the potential transaction values, the greater the fees.
The market is broadly tiered into large investment banks competing for transaction values greater than 100m, mid-tiered advisories at 50m-100m, small advisories at 10m-50m and brokerages who operate at sub 10m deal values.
At every tier a percentage is charged on success that will make economic sense for both the advisor to engage at and for the size of business.
When seeking out who you will engage as your advisor make sure you are aware of the market they operate in, this is their day-to-day expertise, and their relationship base.
For example, a smaller vendor working with a top 10 accounting firm would need to likely pay proportionately higher legal fees because magic circle law firms are who they do business with. That’s even if the deal gets into the legal phase.
As said, the deal needs to make economic sense to the advisory, smaller deals might be taken on just to add to their department bottom line and handed to a junior with limited experience to manage. The partner may pitch alongside the sector expert they brought in, but beyond that, they’ll be charged out to work on the bigger deals that make economic sense to the firm – not the smaller deal.
These smaller deals are often used as training grounds for juniors as its lower risk for them if the deal does not complete, in addition, the expertise to really manage such transactions are not there – the bigger the deal the less work is actually needed due to larger teams and that information on the vendor company is readily available and structured, that is, they’re either PLCs, large private companies with ex-PLC staff or they are seeking IPOs.
Small deals often need much more hands-on expertise, for example to ensure accuracy of accounting information or commercial competence in customer/supplier contracts to ensure they can complete.
Success fees can be charged at a flat percent or what’s known as the Lehman scale, the latter is more prominent at the lower end of the market but also helps adjust for external, unexpected market swings where SMEs tend toward such riskier profiles. On top of this, an upfront commitment fee is charged to cover advisory costs and as a ‘test’ to prove the owner’s commitment to selling.Our preferred model in engaging with small deal M&As is to just talk to the vendors and understand if their aspirations are in line with what we have experienced as the right rationale for selling. In addition, our fees are weighted more on milestones achieved, that is, a deal agreed in principle (Heads of Terms) and on completions.
As the smaller end of the market takes much more time and effort, the brokerages that operate in this space are incentivised to convert a volume of engagement letters with clients rather than actually complete for them. Due to this ‘salesman-like’ setup, the technical expertise isn’t a priority and minimal advisory work for clients is done. They will produce a one pager which fails the google test for confidentiality and send it to almost everyone in the market including direct competitors. If they are lucky enough to find a buyer, sure they will connect them but nothing more useful beyond that, and if the deal completes it’s a nice bonus.
Our fee model completely turns this around where we know and trust our process, put the work in for clients and only paid for successes.
Why not schedule a confidential call with us to learn more about our process or register for one of our events.