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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%.”

Additional Variables

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.

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