Fees can be a touchy topic. This is perhaps why there is a paucity of publicly available data on mergers and acquisitions (M&A) fees. However, with the recent publication of the M&A Fee Guide 2017, we now know more about fees relating to M&A than before. The guide consolidates survey responses from over 470 advisors and investment bankers from around the world. Listed below are some of the survey's key findings and the corresponding implications.
The smaller the company, the larger the fee
One key finding of the survey was that companies with smaller purchase prices had larger advisory fees. The Deal Room offered a strategy to combat these larger advisory fees. They recommended that businesses should speak with many advisors before settling on one, in order to determine what different firms are charging. The survey also revealed that the spectrum of success fees was quite large when the price of a company was below $5 million.
Time-based retainer fees
There are a number of ways in which an advisor can structure his or her fees. For instance, an advisor may choose to use a retainer or engagement fee. These fees are either paid as a flat fee or are spread out over monthly payments. The survey showed that time-based retainer fees were predominantly used compared to their counterpart, fixed fees. It was noted that the preference of time-based retainer fees could be due to the flexibility of avoiding a significant upfront cost, by spreading it out over time.
Success fees
Success fees, as its name indicates, are fees paid in correlation with the successful closing of a deal. These fees are normally derived from a percentage of the worth of the company that is being sold. It is relatively common for parties using success fees to calculate the percentages in a way that incentivizes both the seller and advisor to maximize the deal value for the company. The survey found that 45% of respondents admitted to using success fees in this manner.
Another interesting finding from the survey was the extent to which success fees fluctuated depending on the region and city. The results showed that the majority of US Pacific advisors disclosed using success fees ranging from 2-4% for a $50 million deal. However, the majority of the US Northeast region charged success fees of 1-2% for the same deal amount.
Choosing an M&A advisor
Although fees may be an extremely important factor to business owners in determining which M&A advisor to go with, looking for the cheapest quote may not always be the best policy. It has been recommended that other criteria should be taken into account and that business owners should ensure to ask a plethora of questions beforehand. Irrespective of fees, pertinent considerations include the firm's history of M&A deals, whether they are knowledgeable about the industry you operate in, its efficiency and track record of closing deals and reviews from former clients.
Factoring in the abovementioned considerations, in addition to cost, was recommended based on the notion that some advisors who charge higher fees may be able to sell your business for a much higher sale price than other advisors. While there may still be a lot to learn about how M&A fees are structured, these survey results may be a catalyst for more publicly available information in the future.
The author would like to thank Monica Wong, Articling Student, for her assistance in preparing this legal update.
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