Sales and marketing, Mergers and Acquisitions

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.

Joe Panettieri

Joe Panettieri is co-founder & editorial director of MSSP Alert and ChannelE2E, the two leading news & analysis sites for managed service providers in the cybersecurity market.