Just When You Thought You’d Seen It All
When it comes to M&A fees, I thought I had seen it all. But I was wrong. An M&A engagement letter from another firm crossed my desk and here’s what surprised me.
It included a “Seller’s Remorse Fee.” If the seller receives a letter of intent (LOI) with a minimum deal value and decides to reject it, the seller pays the M&A advisor 33% of the total fee payable as if the transaction were consummated.
Ouch! That’s steep. The last time I checked, a non-binding LOI is a long way from a closed deal. What if the LOI met the minimum deal value, but had terrible deal terms? Would that trigger the Seller’s Remorse Fee?
I understand that all M&A advisors (including me) want to ensure the seller is committed, but a more common way for M&A advisors to mitigate the risk is through a retainer or work fee, typically capped at a lower level of the overall success fee.
In 2018, Divestopedia published a survey about M&A fees. The study was based on 480 responses from investment bankers and M&Aadvisors from all over the world. The published report offers insights on fee structures in major regional markets.
The study reveals significant variations in practices with regards to:
- work fees (also known as retainers, upfront fees, or engagement fees),
- success fees upon completion of the deal,
- break fees (also known as walkaway or termination fees) if the client decides not to accept a bona fide offer from a potential buyer.
In the survey, 61% of the respondents said they did not charge a break fee. One participant noted that it’s hard to define what constitutes a “bona fide offer.” Another respondent said his company includes a break fee in the initially proposed terms, partly to gauge how committed the seller is to the transaction process.
Although that survey was conducted a few years ago, the info is still valuable. Since then, fee structures and legal documents for negotiated and agreed-upon M&A advisory services have only become even more confusing to business owners.
Here’s my advice to business owners who are ready, willing, and able to sell their businesses: Do some research and educate yourself before you engage a team of M&A experts. Ask fellow business owners who have been through the M&A process about some of the most costly surprises in terms of time, investments, and professional resources. If they had it do over again, what would they do differently?
At LaManna Consulting Group, we stand with buyers.
Sellers shouldn’t have to pay exorbitant, unwarranted fees to sell the business they worked so hard to build. Click To Tweet
Call me at 561-543-2323 and I will tell you more about the process as it applies to your business and what types of fees are reasonable and which ones are not. At the end of the transaction, no one in the deal will win if the seller is disgruntled about paying unfair, exorbitant fees.
Recommended Reading
We’re excited to partner with Divestopedia to publish this global survey of M&A advisory fees. In the three years that we have been conducting this research, the M&A Fee Guide has become an indispensable resource for M&A practitioners and business owners.
Divestopedia: 2018-2019 M&A Fee Guide Mid-Market Research Report