Costs may vary from firm to firm, so it is always necessary to ask what the fees will be and how they will be calculated.
Every Type of Fee You'll Encounter During the M&A Process
Whether you have a startup you want to sell or an established company, you are likely to get the best deal by working with a Mergers & Acquisitions (M&A) advisory firm. Of course, M&A advisory services aren’t free and you may be wondering whether it is worthwhile to pay M&A fees when you are selling your company.
Before you choose an M&A advisor, you will need to understand what M&A advisors do, how to choose the right advisor for your situation, and which fees you’ll be required to pay.
What Is M&A Advisory?
M&A advisors are financial professionals who work with businesses and corporations. Another way of putting it is that they are the business equivalent of a personal financial advisor. They offer advice to help companies make smart financial decisions and arrive at advantageous deals.
Most often, they are hired to guide companies through a sale, acquisition, or merger. However, they may also play a key role in negotiating debt and equity refinancing, corporate restructuring, and other major transactions.
What do M&A Advisors Do?
People who have never worked with an M&A advisor often ask us what we do. We assist our clients with many transactions, acting as an intermediary to help them find buyers, negotiate prices, and navigate the specifics of the deal both before and after it is finalized.
Some examples of the specific things we do for our clients include:
- Represent sell-side and buy-side clients in mergers and acquisitions
- Help business owners understand the language of mergers and acquisitions
- Arrive at an accurate valuation of a seller’s company
- Help sellers identify and vet potential buyers for their companies
- Act as a middleman in negotiations to get the best deal possible
- Plan for contingencies to minimize the risk of a deal falling through
- Structure the deal to be advantageous for our clients
- Help sellers plan an exit strategy that aligns with their company’s goals and objectives
- Advise on stock issuance and stock placement
- Underwrite the issuance of securities
Whether you want to sell your company, merge with another enterprise, or you’re looking to acquire businesses to achieve your growth goals, we can help you get to the best deal possible.
How to Choose an M&A Advisory Firm
Ideally, you will choose an M&A advisory firm that will walk side by side with you through the entire transaction. That is the best way to negotiate a deal that meets your needs and expectations.
Choosing the right M&A advisory firm requires careful research and vetting. Here are some pointers to help you make the best decision.
General experience with mergers and acquisitions is a must for any advisory firm, but your choice should be a firm that has experience with deals similar to yours. You should ask if they:
- Have experience on the seller’s side of the table
- Have experience in your industry or sector
- Have experience with deals of a similar size as yours
- Have achieved premium deals for companies like yours
That first point is an important one. A lot of M&A advisory firms are run by people who have never sold a startup. While it’s not empirically necessary for someone to do a good job representing your company if they’ve never sold a company themselves, the experience of selling a company makes M&A advisors more aware of the challenges that sellers face.
NorthStar’s founder has personally sold two companies and has an in-depth understanding of what sellers need and want.
Once you have ascertained that an M&A advisor has the experience necessary to guide your company, the next thing to ask is what their process is. There are many steps to any sale or acquisition and it’s essential to have an advisor who won’t cut corners or leave you to fend for yourself.
There are several ways you can find out about a firm’s process. You can:
- Ask if they have documented their process and are willing to share the documentation with you.
- Ask for references and talk to them about their experiences during the M&A process.
- Ask to see a sample project plan.
- Ask questions about how they update clients on their progress and how often you can expect updates.
As is always the case, you should be wary of any firm making promises that are too good to be true. The gold standard here is honest and frequent communication with steady guidance at every step of the process.
The next question to ask is about the team that will be walking by your side throughout the transaction. You need an experienced team familiar with your industry and with deals like yours.
We suggest asking how many people are on their team, what their experience is, and how many deals they handle at once. Some M&A advisory firms are “volume shops” that make their money by doing tons of deals at once. Often, their focus is on getting to a sale and not necessarily on negotiating an advantageous deal for their clients.
At the same time, you may also want to ask about the average size deal for the team. If your deal is on the smaller side, it’s possible they will cut corners if they can. Ultimately, you should hire a firm that will give your deal the full time and attention it deserves.
The last thing you should review when choosing an M&A advisory firm is the fees and fee structure. You will need to make sure you understand how much they charge and what services are included in the charge.
Only after reviewing the information you have gathered should you choose the M&A advisory firm you want to work with. Finding the right fit is essential if you want to make the deal that’s right for you and your company.
Do I Have to Pay for M&A Advisory?
The issue of payment is one that looms large for any company hiring an M&A advisor. If you sell your company, you know you will have money coming in. However, you may still be wondering whether you need to pay up front and how much it will cost you to hire an M&A advisory firm.
Is There a Cost Associated with M&A Advisory?
The process of selling or buying a company can be quite complex and most business owners are not prepared to walk the path alone. Help is available from M&A advisory firms and one of the most common questions business owners ask is about the cost associated with hiring an M&A advisor.
The short answer is that there is a cost associated with hiring an M&A advisory firm to guide you through the process of selling a company. The costs are there for two purposes:
- To pay for the services your M&A team provides and the time your M&A team spends seeking out, negotiating, and finalizing a deal on your behalf.
- To help the M&A firm recoup the money they spend on marketing, documentation, and other costs associated with the sale of a business.
What Type of Fees Can I Expect?
There are several types of fees associated with mergers and acquisitions. Some are charged up front, some are ongoing, and others are paid only upon completion of a deal. Let’s break it down.
The Engagement Fee is an up-front fee that serves as a way to ensure that the client has a financial stake in making a deal. This fee is usually non-refundable. It is not enough to cover the M&A firm’s expenses. Rather, it is a payment that is meant to dissuade clients who are not serious about selling.
What the Engagement Fee will pay for is the initial cost of setting up your company profile and the expenses associated with marketing your company and contacting buyers. Fees may range from $10,000 to $25,000 or more depending on the firm and the size of your deal.
The next type of fee that you will need to pay when you contract with an M&A advisory firm is a monthly retainer. The retainer is meant to cover the ongoing costs associated with putting together a deal, at least in part. It is rare that a retainer covers everything.
The work covered by the retainer may include:
- Performing an accurate valuation of your company
- Preparing your company for sale
- Contacting and meeting with potential sellers
- Negotiating the terms of a sale
- Aiding you with the transition after the sale of your company
The benefit of paying a retainer is that it typically ensures a high degree of engagement and service from the M&A firm you hire. The fact that the retainer is usually not high enough to cover every expense associated with selling a company is a good thing for M&A clients. There is a significant incentive for the M&A advisor to make the best deal possible.
The amount of the retainer is typically based on the size of the deal, and we’ll talk more about that below. However, the range is usually somewhere between $5,000 and $20,000 per month.
The success fee is a fee that you pay only when a deal is completed. This fee is how the M&A advisor you hire earns back the money they have invested in putting together a deal.
The fees can span a wide range of numbers depending on the size of the deal. We’ll talk more about how they are calculated below.
M&A retainers, as we mentioned above, are monthly fees that secure your M&A advisor’s services and give them the money they need to market your business to buyers, perform due diligence, and put together a deal.
The retainer amount is linked to the size of your company and, therefore, to the size of the final deal. It is rare for the retainer to be enough to cover every expense associated with putting a deal together. However, it does offset at least some of the expenses and make it possible for M&A advisors to do what they do.
The success fee is the final fee associated with M&A advisory. It is the fee that you will pay at the end of your relationship after your deal has been finalized and money has changed hands. It is most typically a percentage of the sale price of the company.
There are several ways to calculate the success fee, some more popular than others. We will review those in the next section.
How is the Fee Calculated?
M&A fees may be calculated in a variety of ways. Some calculation methods are best suited for large deals while others are designed to be fair and affordable for smaller deals. In this section, we will explain the various methods and then tell you which one we use at NorthStar.
- The Lehman Formula. The Lehman Formula calculates the M&A success fee by charging a reducing fee for each subsequent tier of a deal. In other words, you’ll pay more for the first million of the sales price than you will for the last million.
- The Accelerator Formula. This formula is almost the exact opposite of the Lehman Formula in that it pays the M&A advisory firm more for the last million dollars of a deal than for the first million. It is best suited for large deals because it incentivizes the M&A firm to put together the largest deal possible.
- Flat Fee. There are arguments against using tiered fees and for that reason, many M&A advisory firms operate on a flat fee. Most commonly, the client would be charged between 2% and 5% of the final sales price of the company depending on the size.
Before you contract with any M&A advisory firm, you should ask how they calculate fees and get an estimate of what you will pay. You should also ask about what is included in the fees. For example, will the M&A firm do a valuation for you? Will they market to potential buyers? It is essential to know what you will be paying for.
M&A Advisory Payment Methods
Payment methods for M&A advisory services can vary. However, it is typical that those firms that charge a commitment fee require payment upfront, and payment may be via check, money transfer, or credit card.
Retainer fees are charged and must be paid on a monthly basis. Here again, the payment may be made via credit card, money transfer, or check.
Success fees are not paid until a deal has been negotiated and finalized. When money changes hands for the purchase of your company, you will be required to pay the success fee. You may choose the payment method that suits you unless your M&A advisor specifies a payment preference.
Some M&A advisory firms charge additional fees, but we do not. We operate on the basis of full fee transparency. Each client who works with us receives a custom quote based upon their company and what is required to prepare it for sale and position it for maximum enterprise value.
In other words, our goal for every deal is to work with the client to arrive at a price that is both fair and provides the advice and services required to get you to a successful and lucrative deal.
At NorthStar, we work with sell-side businesses every day, helping them to arrive at a proper business valuation, attract qualified buyers, and structure deals to their advantage.
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