M&A Advisory Fee Structure: 2023 Report
M&A advisory firms are notoriously opaque about their fee structure. There are several reasons:
- Keeping the fee structure private allows them to remain competitive when owners are at the initial conversation stage
- Standard fees can be fluid based on individual situations (e.g., owner wants to sell immediately vs. sell to the highest bidder)
- Firms may specialize in one sector, making their services more valuable in that industry, and a published fee wouldn’t communicate that value
The table below provides average fees associated with hiring an M&A advisory firm. Our team collected this data using publicly available information and then segmented it by company size as expressed by EBITDA.
M&A Advisory Fee Structure, Summarized
|EBITDA Range||Retainer Fees||Success Fee||Fixed Success Fee||Flat Percentage Success Fee|
In the following sections, we define the different fee types used in this table and explain how they work in an M&A advisory relationship. We also provide context, suggestions, and warnings business owners would find useful when contemplating selling their company.
M&A Advisory Fees, Explained
Fundamentally, M&A advisory fees break down into two categories:
- Retainer Fees: Fixed amounts charged up-front to ensure that the owner is committed to the process. As the advisory firm does its work, the retainer is drawn down.
- Success Fees: Fees paid to the selling firm upon closing. May be fixed, flat percentage, scaled, or reverse scaled.
- Fixed Success Fee: A success fee in the form of a predefined dollar amount, distributed at closing. Often used in deals that require minimal work to close.
- Flat Percentage Success Fee: A success fee in the form of a percentage of the company’s enterprise value upon closing.
Success fees can also be presented as “scaled” and “reverse scaled,” meaning a certain percentage is added for every million earned during closing. The Lehman Scale, an industry metric for distributing these percentages, breaks the process down as follows:
|Name||1st MM||2nd MM||3rd MM||4th MM||Remaining Total|
|Scaled Success Fee||5%||4%||3%||2%||1%|
|Reverse Scaled Success Fee||1%||2%||3%||4%||5%|
These fees are used for different purposes: Retainer fees ensure that a client is committed to the process of selling, effectively keeping sellers out of the market until they are ready to engage. Success fees ensure the advisory firm’s incentives align with the sellers’, which can range from simply getting a deal done no matter what to getting the highest amount possible.
|Note: Companies that do not have an in-house legal team will also incur legal fees in addition to the advisory fees outlined above. It’s important to consider legal firms with a specialization in M&A, as deal structures are typically abstruse.|
M&A Advisory Fee Structure Red Flags
One of the top priorities of any business owner wishing to sell their company is working with an M&A advisory firm that will genuinely represent their interests. This section offers insights into what to watch out for when considering M&A firms and is based on my personal experience selling several businesses, as well as conversations with fellow business owners.
Performance-Based Fee Structure
First-time sellers often make the mistake of thinking that they know the value of their company better than the people who sell companies for a living. As a result, they believe they are getting a great deal when a firm agrees to a low initial percentage that comes with something like a reverse scaled success fee.
In general, M&A advisory firms will not agree to this structure unless they believe that your company is worth more than you believe it is. Taking on this structure is risky unless you’ve done an in-depth valuation before agreeing to engage an advisor.
While it may seem like a company willing to change their rates is doing so in order to work with you, you should view it the same way you would in any sales situation. If a firm quotes you 5% one day and is willing to drop to 3% the next, that means the bottom line was always 3%, and the additional 2% was just a higher profit margin for them.
By contrast, firms that stick to their guns on pricing typically do so because they have closed enough deals to recognize that their initial % is based on what works best for them and the client.
Mid-market companies – the typical companies seeking sell-side advisory – are usually looking at a success fee of 3-5%, but what that percentage is of deeply impacts your takeaway from the deal. The two options are company valuation and price received on closing. While the close price seems to be the fairer option, your deal is likely to involve stock, which won’t be realized for years and can vary widely in value; thus, getting clarity on what number the fee percentage applies to is especially important.
Selecting The Right M&A Advisor
Your M&A advisor’s fees will be part of your decision in choosing an advisor, but it is more important to find a firm that will represent your interests well and get you maximum value for your company. Getting a slightly better success fee of 3% is a shallow victory if the firm can’t get offers as high as a more talented advisor.
|Related: See our 2023 report on the Top M&A Advisory Firms in the US.|
So, what aspects should a business owner look for in a potential M&A advisory firm? The most important metrics include:
- Experience: While bigger doesn’t automatically mean better, larger companies probably have a track record of sustained growth, indicating a successful tenure. By contrast, firms doing two or three deals before going out of business the next year indicate a short-term desire for profit that rarely, if ever, benefits clients.
- Volume: The best advisors will be the ones that are capable of handling a larger workload. Firms handling 50-70 deals a year, for example, have built a greater level of experience than a firm that only handles half a dozen at the same time.
- The Agent: Who is handling your deal on a day-to-day basis? Is the firm sending their most experienced representatives (CEO or co-founders) or someone else? This question is often the bane of larger M&A advisory firms that have to place junior executives on mid-sized deals due to their workload.
Fundamentally, choosing the right M&A advisory firm is about finding the right match for your goals in selling. You’ll certainly want to work with a firm that has sold businesses in your EBITDA range, and perhaps in your industry as well, but the goals of the firm should also match your intent as a seller.
There are many areas of specialization among M&A advisory firms, making it especially difficult to find the one best suited to your company’s unique needs. A good next step is to speak with the ones who have done the most deals recently. We published a report on the top M&A advisory firms in the US, which you may want to reference. You can also feel free to reach out to me personally if you have questions.