How Much Should You Pay An M&A Advisory Firm?
You want to sell your business. And you’re willing to potentially hire a professional advisor to assist the process. So how much will you wind up paying an M&A (merger and acquisition) advisory firm?
You know the typical answer: It depends on a range of variables. But we’re here to help at least frame the conversation. First, why you may need an M&A advisor. How about to…
- get your finances in order;
- pinpoint potential suitors and attract bids;
- serve as a go-between and a proctor who keeps sale negotiations moving along;
- identify practical deal terms to help maximize the sale value and ease the ownership transition; and
- plenty more.
The average advisory fee is…
- $225,000 on a $5 million deal;
- $665,000 on a $20 million deal; and
- $1.3 million on a $50 million deal.
Those data points are from a survey developed by Firmex and Divestopia. The survey, conducted from August to October 2016 generated 320 responses. Nearly two-thirds of respondents (211) listed their occupation as Investment Banker or M&A Advisor. In comparison, the next-largest categories were a Business Broker, at 10.6%, and Business Development roles at 7.2%, the report stated.
The survey participants also were quite active in the M&A market.
- 39.34% reported working on one to five deals annually
- 29.9% reported working on six to 10 deals each year; and
- 17.5% of respondents reported their firms completed over 16 deals a year.
The Lehman Formula
Let’s assume you successfully sell your business, with a healthy assist from an M&A advisor. Here, many advisors charge a so-called success fee that fits into one of three categories:
- Simple percentage, 37.4%
- Scaled percentage, 37%
- Lehman formula, 25.6 percent.
The Lehman formula is a
“descending scale and can be structured where the first$5 million of a deal’s value may be charged a certain percentage, say 6%, Then, the next five million another percentage, say 3%, and the remaining amount can be charged another percentage, perhaps 2% for example,” the survey writers say.
Conversely, for a scaled percentage structure,
“a valuation target is set and a base-level success fee for this valuation is determined, with increments above this target valuation earning successively higher fees. To illustrate, a $10 million dollar target valuation could earn a 2% fee, the next $10 million may earn 3%, and the next $10 million may earn 3.5%.”
Many brokers use a mixed approach. For instance:
- Perhaps there’s a monthly retainer fee, typically designed for a fixed length of time (perhaps six months). Say, $50,000.
- Then, there’s a commission based on the company sale value. Say, 6%.
Let’s assume you wind up selling your business within a six-month window for $5 million. In that scenario you’ve paid:
- The $50,000 retainer.
- And now you owe the 6 percent commission on the $5 million — which computes to $300,000.
- The twist: The actual commission payment can be $250,000 because many brokers will credit you the original retainer fee.
That’s just one hypothetical example. Your mileage will vary. Let us know how the journey goes.