This is an excerpt from my new book: Early Exits – Exit Strategies for Entrepreneurs and Angel Investors (But Maybe Not Venture Capitalists).
Several people have mentioned how much they appreciate this section of my book. It’s surprisingly difficult to get information about M&A advisor fees for exit transactions. Few professionals post their rates. I am not sure why this is, and even less sure that it makes sense in today’s hyper-connected world.
M&A advisor and business broker fees increase with the size of the transaction, but not in direct proportion. The amount of work required to complete a larger exit can actually be less than that of a smaller transaction. Where this becomes interesting is at the smaller end of the transaction size range.
For a transaction to make sense for the big firms with downtown offices, the total fees have to be in the $1 to 2 million range. For the boutique firms, the minimum fee size is in the $500,000 to $1 million range. Individual practitioners can afford to do exit transactions where the fees are only a few hundred thousand dollars.
The standard M&A advisor fee model includes a work fee and a success fee.
Work fees are paid by the company up front or, sometimes, monthly over the first four to six months. This covers the M&A Advisor’s direct costs during the initial stages, as well as their contribution to the preparation of the selling documents and due diligence materials.
For larger transactions, the work fees are usually $100,000 or more. For boutique firms working on a $20 to 30-million exit transaction, the work fees are usually in the $50,000 to $75,000 range. At the lower end of the transaction spectrum the work fees don’t usually go below $50,000 because no matter how small the transaction there is still a fixed amount of early work that has to be done.
Success fees for exit transactions in the $10 to 30-million range are typically 4-6% of the final exit value. This means that the business broker who successfully completes a $25-million exit transaction will usually be paid a fee at closing of about $1 million.
For transactions over $100 million, I have heard of success fees that are in the 2-3% range. This means that a broker executing a $100 million exit will typically receive a success fee in the $2 to 3-million range.
Where success fees become more challenging is in the smaller size transactions because the amount of work required to execute a $5-million exit is not significantly less than the effort required for a $25-million exit. It takes just about as much manpower in either case and in some ways the smaller sizes are actually more work. Because of the amount of work involved in a $5-million transaction, the success fees are often in the 7-10% range.
I’d appreciate hearing from you about your experiences with M&A Advisor fees. The only way I have been able to aggregate this information is by asking CEOs, board members, investors and M&A advisors that I meet. If you have a data point you can share, please either leave a comment below or email me directly.