The Mysteries of M&A Fees

You get what you pay for

In our experience, most successful entrepreneurs follow a cardinal rule: control your expenses. This is admirable! However, the maxim can be taken too far, leading owners to question why they need accountants, lawyers, or investment bankers at all.  

Consider the ROI. When applied skillfully, the right advisors’ expertise can help increase the payout an owner receives. Professionals in the mergers and acquisitions (M&A) field are usually a good investment because they can help sellers avoid costly mistakes that can pile up during a transaction.  

Types of M&A fees

Selling a business will involve legal, accounting, and investment banking fees. Legal and accounting fees are typically charged by the hour and incurred whether or not the deal closes. Investment banking fees, in contrast, are largely success-driven. Other than small retainers, the large majority of investment banking fees are paid only if and when the deal closes. 

Let’s break out these three types of cost for a deeper dive on each. 

Legal fees

Anyone selling their business should retain competent, experienced deal counsel—that is, an attorney or legal group doing numerous deals every year.  

Hiring your friend or your corporate lawyer to handle the legal intricacies of a transaction will end up costing you. These attorneys may be great at what they do, but you need someone who has deep knowledge of M&A. Relying on counsel without significant, relevant experience leads to a less efficient process, higher risk of a busted deal, and potentially greater legal exposure after closing.  

In the more than 100 transactions we’ve managed, I’ve seen legal fees ranging from $25,000 to over $500,000. There are many factors affecting how much you’ll pay, including: 

• Company and deal complexity (e.g., level of regulation, environmental or intellectual property issues, unique labor or employment concerns) 

• The type of deal process (e.g., multiple bidders or just one) 

• Need for regulatory filings accompanying the transaction 

• Negotiation strategies of the buyer (e.g., are they accommodating to get the deal done or want to nitpick every point) 

• Strategies you’ll pursue to minimize the tax burden 

Such variability means that it can be hard for an attorney to supply an accurate fee estimate up front. We recommend that sellers pay more attention to expertise than billing rate. An attorney charging more per hour can wind up costing far less—in dollars and stress—than someone less experienced but cheaper per hour.  

A larger firm with several areas of legal expertise will typically quote higher rates than a one-person shop. But the big firm may also identify and resolve issues faster than the smaller one. This is important because time kills deals, so having a responsive and efficient legal team is critical. 

Accounting fees

Know this—the buyer you’re negotiating with will analyze your financial statements ad nauseum. A good accountant can help you prepare. 

In most larger transactions—typically any deal valued at over about $15 million—the buyer will hire an outside accounting firm to perform a quality of earnings review, known as a “Q of E.” I refer to this exhaustive examination as an “audit cubed.” It’s not just a check of your historical financials, but also an attempt to validate key assumptions behind your financial forecasts. 

Well-prepared sellers won’t wait for the buyer’s Q of E; they will have their own accounting firm do a Q of E before taking the company to market. Why? You don’t want to be surprised during due diligence with a financial problem that will lower the purchase price or derail the deal. Instead, you want to identify, and then either rectify or prepare an explanation for, any issues a Q of E may reveal. 

A seller-prepared Q of E review can cost anywhere from $35,000 to over $200,000, depending on the type of firm performing the analysis and the complexity of the company’s financials. Big Four accounting firms will charge the highest rates because their brand names lend credibility to the analysis. 

In our experience, the cost of a seller-prepared Q of E review is well worth the investment. The extra scrutiny speeds the buyer’s due diligence process, eliminates surprises, and often reveals one-time upward adjustments to earnings that can cover the fees you pay to the team preparing the report. 

Investment banking fees

Investment banking fees vary significantly from firm to firm and depend on the transaction size and complexity. Smaller banks generally charge less than larger ones, but this isn’t always the case. 

Investment banking fees are typically split into two categories: retainers and success fees.  

Retainers 

A client pays to reserve an investment bank’s services. Fees may be charged one time, monthly, or upon achievement of certain transaction milestones. Depending on the size of the investment bank and the team working on a deal, you might incur costs in ranges such as these: 

• Monthly retainers may total $5,000–25,000 per month 

• Flat-fee retainers could be $25,000–100,000 

• Milestone-based retainers might be $50,000–100,000 charged over time as you complete various steps of the process  

Retainers are sometimes credited toward the success fee, but not always. 

Success fees 

Once a deal closes, you’ll also pay a pre-agreed sum to your investment bank. There are several possible structures for this.  

Smaller transactions might use a “reverse Lehman” formula in which you pay a declining percentage of each successive million dollars in deal value. For example, this might be 10% of the first million, 8% of the second million, 6% of the third million, and 4% of each million thereafter.  

Or you might instead agree to a flat success fee, a fixed percentage, or a percentage that’s low up to a target dollar amount and higher for amounts exceeding that target. Many sellers prefer this last structure because it appropriately incentivizes the investment banker to get the highest valuation possible for the company.  

For example, the client and investment banker might agree to a fee structure of 3% up to $20 million, 5% for amounts between $20 million and $40 million, and 7% for amounts exceeding $40 million.  

A similar structure can establish tiers based on multiples of earnings before interest, taxes, depreciation, and amortization (EBITDA) instead of set dollar amounts. In our example, the client might pay 3% for amounts up to 4x EBITDA, 5% for amounts between 4x and 8x EBITDA, and 7% for amounts exceeding 8x EBITDA. A downside to this method: complications arise if the actual EBITDA as determined by the buyer is less than the EBITDA originally represented by the seller.  

In general, the smaller the transaction, the higher the percentage of deal value that will be assessed in fees. Roughly speaking, fees for a $10 million deal might be 5–8% versus 4–6% for a $20 million deal, 2–4% for a $50 million deal, or 1–3% for a $100 million deal.  

Keep in mind that fees depend on the structure you agree to with your investment bank. A seller might be willing to pay the investment bank a much higher percentage on amounts that exceed their expectations for a transaction. 

Also be aware that some investment bankers have minimum fee amounts, regardless of the calculation method. Many larger investment banks require at least $1–3 million for mid-market transactions. 

Assessing your advisor’s value

Each deal is unique, so it is hard to predict the structures your advisory team might propose. Ultimately, you need to estimate the value they bring in order to determine whether the fees they charge are reasonable.  

A good question to consider asking references—do you feel like you got your money’s worth? The answers you hear should be informative. That’s because a great advisor will more than earn their fees by effectively positioning the business, garnering strong interest from buyers, negotiating an advantageous transaction to maximize value, and helping to navigate many of the pitfalls that accompany an M&A deal. Clients who have benefited from such expertise will usually sing their praises.  

Engaging the right advisors can be a difference-maker in your deals, so do your research and choose wisely!