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Rich and Co.

Typical Mergers and Acquisition Fees

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Fee Structure
The total compensation received by a M&A Consultant will usually consist of a retainer fee and a fee payable on completion of the desired transaction; the latter is sometimes referred to as a success fee.

Retainer Fee
This is a flat amount, usually paid either at the beginning of the engagement or on a periodic basis over the term of the engagement, for example (and most commonly), a monthly fee.  The retainer fee is generally nonrefundable, although sometimes retainer fees are credited against success fees.

Success Fee
This is payable either at the closing of the transaction for which the Consultant was engaged or (as discussed below) possibly over time if future or contingent payments are involved. In addition to retainer fees and success fees, an engagement letter may also provide for payments at other points in the transaction or as a result of other events.  

The success fee is usually based on a percentage of the total “transaction value” or “transaction consideration,” although the parties may also consider providing for a flat fee to simplify calculation and avoid some of the issues discussed below.  It is also common for the engagement letter to provide a certain minimum payment amount, although the parties may want to ensure that the size of the transaction warrants a minimum payment.

Success Fee Triggers
For purposes of identifying the types of transactions that will trigger a success fee.  Defining the transactions that will trigger a success fee can be more difficult than it initially appears, because at the time of the engagement there may be many unknown variables regarding the ultimate form of the transaction. Issues may arise with respect to certain transactions that are not clearly identifiable as either financing transactions or acquisition/sale transactions, such as an issuance of securities that represent a significant minority interest in the client. There also may be transactions that may technically fall within the transaction category but are clearly not within the intended transactions for which the Consultant was engaged. For example, it is unlikely that an Consultant will be engaged to obtain a bank loan, but without careful drafting, a bank loan could be considered a “financing transaction” under the engagement letter. Other categories of transactions that may warrant careful drafting to reflect the parties’ intent are licensing agreements or leasing arrangements. Depending on the nature of the client’s business and whether the client enters into such transactions in the ordinary course of its business, licensing or leasing transactions may be appropriately excluded from, or included in, the definition of a transaction that will give rise to a transaction fee

For example, an engagement letter may provide for a fee payable on signing of a term sheet or the definitive agreement or on the client’s public announcement of the transaction.

Termination Fee
Another type of fee that may be provided for in an engagement letter is a Termination Fee, which requires the client to pay the Consultant a portion of any termination or break-up fee that the client receives in a transaction.

Transaction Value
Defining the “transaction value” presents a number of difficulties, including what to include in determining “value” and what value to assign to noncash consideration or future payments.

As in defining the types of transactions that trigger a payment obligation, the Consultant will want to broadly define what is included in the calculation of transaction value, e.g., to include favorable noncompetition, employment, consulting, licensing, or supply agreements and assumptions of debt; the client, however, will want to limit the value to the actual consideration paid. Whether such provisions are reasonable largely depends on what type of transaction is expected and the nature of the client’s business.

When “value” includes items other than cash payable at closing, such as noncash consideration or future payments and earnouts, an issue also arises regarding how to calculate the value of these items. For example, consideration payable in common stock of a private corporation is not easily valued. Similarly, future or contingent consideration, such as payment of an earn-out or the sale of warrants that may or may not be exercised, is difficult to value as of the time of completion of the transaction. This difficulty is compounded by the fact that the parties must determine whether fees based on these forms of consideration should be payable at the time of closing, which is generally preferable to the Consultant, or at the time a future or contingent payment is actually paid (if ever), which is generally preferable to the client.

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Written by Rich and Co.

December 28, 2011 at 5:02 pm

2 Responses

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  1. What do you think a % success fee for the investment banker would be for a straightforward sale of stock (C corp) transaction, in which due diligence is limited (due to a straightforward business model, organized and limited – due to relatively limited biz history) – if the acquisition price were (a) $25mil; (b) $50mil; and (c) $75mil?

    The info that I’m finding on the internet is kind of all over the place.

    Anonymous

    May 19, 2013 at 6:26 pm

    • Good question. First, the fee is always flexible. The main components are time spent on the transaction but also intellectual capital of knowing and qualifying quality buyers and then involvement in negotiations.

      Our experience is that, while double Lehman, is the standard, generally, especially on transactions of the size you mention, the fee is lower. Consider also deferred compensations/pay outs along with the final transaction value.

      Talk more about your specific situations?

      Rich and Co.

      May 20, 2013 at 4:26 pm


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