In order to maximize transaction value, Middle Market sellers and their M&A advisors know that it is in their mutual best interest to reasonably compensate advisors, this typically includes M&A success fees. Where M&A success fees and retainer fees are too low, good advisors will generally walk away from the opportunity with the seller probably unlikely to achieve their best deal. Avoiding the use of an experienced advisor may ultimately cost the seller dearly; they may never know the “unknown prospect” or the value of the offer never received or deal terms never negotiated nor the financial sum left on the table. Transaction stress and deal fatigue is something they will be facing on their own!
Studies have shown that good advisors generally increase the transaction value by 10% to 30%, a significant financial benefit over the M&A success fees charged not to mention the many other benefits that a good advisor brings to a transaction. Sellers add the most value to their deal by concentrating on their business, ensuring that it continues to perform well while leaving the sale process in the hands of a good advisor.
Success fees are typically a percentage of the selling price (transaction value) and paid on closing a sale. The percentage used will vary based primarily the size of the transaction. Success fee calculations are often derivatives of the “Lehman formula”. This success fee structure was developed early in the 1970’s for large Walls Street transactions. As the sale price goes up, the fee as a percentage, goes down. More recently for middle market transactions, this has evolved into the “Double Lehman” with rates as follows:
- 6% to 8% for the first $2m of transaction value, then
- 5%, 4% and 3% for each successive $2m in transaction value and then
- 2% for of the transaction value exceeding $8m.
- 1% for values exceeding $20m.
- All of this is usually with a minimum success fee of around $200,000.
A Double Lehman Fee Schedule, using above percentages but with 2% for values above $20m, is shown in the example below. Percentages do vary between advisors:
|Transaction Value ($000)||Fees (%)||Success Fee ($000)|
Flat/Fixed M&A Success Fees
Sometimes advisors charge flat fees, these do however typically end up with a similar value to the Double Lehman calculation. The flat fee may be a fixed amount or a fixed percentage. A simple M&A success fee structure is easiest to understand, discuss, negotiate and manage.
For transaction values less than $5m, the M&A success fees are typically $250,000. In some cases, the Double Lehman formula may well charge 10% on the first $2m.
Blended M&A Success Fees
A blended M&A success fees schedule may look like:
- Very small deals ($3 million or less) that rarely fall below $250,000
- Small deals ($4 million to $10 million) that range from 7% to 5%
- Medium deals ($11 million to $20 million) that range from 6% to 3%
- Larger deals ($21 million to $35 million) that range from 4% to 2.5%
- Still larger deals ($35 million to $50 million) that would range from 2.5% to 1.5%
- Deals exceeding $50 million in transaction value drop fairly rapidly to just over 1% and routinely are subject to negotiations.
In some instances, structuring of fees is on an inverse percentage basis with the rate increasing on increasing transaction values. Kickers may be included where the seller believes a certain price threshold is achievable and wants the advisor to focus on this higher value. An example might be 4% up to $8m plus 8% for the value of the transaction over $8m. Another example might be 5% up to $20m or 6% of the full transaction value for a deal over $20m. The idea being that the advisor will push to gain a higher value driven by his success fee. Often though, the advisor is concentrating on getting the best deal done with little time for calculating or adjusting the deal based on M&A success fee structures.
Deal value is generally driven by competitive bidding and the advisors overall sales process. Provided the basic M&A success fee agreement is fair, there is already a sufficient prize to the advisor using a simple fee structure. Avoiding disputes arising from fee complexity and rather having advisors focus their efforts on achieving the best deal for the seller is far more preferable.
Other Fees, Costs and Retainer
Third-party fees for legal, tax and accounting services are payable by the seller. Valuations of property and plant and equipment or business valuations are all paid by the company or sellers.
Advisors also charge a retainer, either monthly or fixed lump sum. Retainers sometimes called a “commitment fee” ensure seller alignment and committing financially to the sale process. Disbursements including advertising, video production and travel costs are also for the account of the seller.
Indicative M&A Success Fee Range
All M&A advisors have their preferred success fee structure and rates and may use a sliding scale like the Lehman formulae or have a fixed rate or fixed fee. Fees are influenced by industry, size of transaction, advisor type, services offered, how the business is performing and market conditions. Despite the many structures and formulae used, midmarket success fees typically range between 2.5% to 6% of the transaction value.
Fees and fee structures are not set in stone and M&A advisors are generally open to discussion and typically structure their fees to meet the needs of a specific transaction. The M&A success fees are all detailed in the M&A intermediary services agreement which covers all aspects of the fees and advisor engagement.
Contact Optimal to discuss and gain an understanding of our M&A success fee structures.