M&A Advisor Fees for Selling a Business

Selling Your Business? Stop Leaving Money on the Table

Contents:

Update 2016

Unlocking the Value in Your Business – Preparing an Exit Strategy

A premium is the amount a buyer will pay, over and above the notional value. However, the way that the purchaser itself is being valued is also a factor in this equation. An example of one of these rare, dilutive cases would be the acquisition of a technology. In cases like this, it may make sense to accept short-term dilution to earnings i. An example of an accretive acquisition is best illustrated by analyzing a publicly traded company. While the example is simplistic, the concept to take home is: How much of a premium should Company A pay?

This is the technical dance; the grey area between the intrinsic value and the value to a buyer. So what will a strategic buyer pay? They will pay somewhere between the notional value and the value to the buyer. Creating a competitive bidding environment can persuade the winning buyer to pay more than the notional value and share some of the value to the buyer with the seller.

Now that we have examined the logic that drives a strategic buyer, what logic drives a financial buyer?

Update 2016

Good luck with the engagement! The client insists they should not have to pay the success fee until the payments are actually received. Inevitably, inboxes became crowded and the frequency of meetings increased. Someday I imagine the seller will win the bet and get the discounted success fee. Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. How do I transfer my business to my children? Others sell for lifestyle reasons:

First of all, what is a financial buyer? A financial buyer is one who is buying strictly for a financial return. Financial buyers include individual investors, who have either saved up or cashed out; institutional funds such as venture capital funds for early stage high growth opportunities; and private equity funds , which come in many varieties including leveraged buyout , growth capital, distressed and mezzanine funds. There are more than 40, private equity funds in North America ranging from individuals to multi-billion dollar funds such as BlackRock, Onex, Kohlberg and Kravis Roberts.

Sometimes this is relatively straight forward and other times it is pure guess work. For example, calculating what revenue and profit your product or service might generate in a much larger customer base or distribution channel when you have good data on take up rates might be relatively easy. But working out what contribution your incomplete technology might have is problematic. Sometimes you can look to equivalent deals to see how large corporations have valued similar contributions. This has generally proved to be useful with recent acquisitions of internet community businesses where a price can be estimated per member.

In the end, it really comes down to two factors. First, are you certain that you can generate a price for your business above the value which could reasonably be calculated from its inherent future earnings, in which case you are better off with a strategic buyer.

Secondly, you need to ensure you have multiple buyers competing in the deal. My previous record from first contact to money in the bank was 3 months. I helped to close a transaction late last year that was only 63 days.

Deals are definitely closing faster. Good article, you are right we should talk more openly about this, especially why selling small deals can be so expensive. I agree with you, an open discussion is good for both advisors and sellers. Evgen — When the transaction size gets that large, there will be a considerable amount of negotiation on the fees. It will also depend on how much work is involved in preparing the company.

Within the Canadian context I have seen vendor advisor contracts that upon success the work fee is converted to a prepayment of the success fee, a deposit as you will. An asset sale will draw a GST liability. Whereas a successful share sale will be a financial transaction exempt from GST in Canada. Therefore if the work fee is converted under contract to a prepayment of success fee a savings can be achieved.

Good point on the GST, Derek.

We are seeing a lot more asset sales in cross-border transactions as a result of the new rapid depreciation rules in the US. I am looking at structuring an engagement fee with a mid size firm targeting an initial small acquistion approx 5m and the model proposed is the typical upfront assessment fee, monthly retainer and ultimate success fee. What I need is someone to undertake a review and ensure there are no missing pieces. How would you suggested altering the standard fee model? Also assuming we stick with the traditional upfront, retainer and success fee model — would the upfront and retainer fee be deducted from the success fee or in addition to?

That type of expense is primary reason there are upfront fees — to cover your out of pocket expenses. I believe the upfront and retainer fees should be deducted from the success fee — but lately, in this hot market, I have been noticing some firms quoting them as nondeductible. The important thing for both the firm and the clients is to be absolutely clear. Your ranges are spot on from my experience in the US and Europe. Usually, the fees are proposed much higher but after some negotiating and wrangling, they consistently seem to end up within the ballpark of those mentioned in your article.

I have been approached by a family business to join their firm and prep their finance and operations groups for a sale of the business.

Unlocking the Value in Your Business – Preparing an Exit Strategy

They have been very successful but very loosely run so they could probably be much more profitable than they currently are. Have you seen situations where an in-house C-level executive is paid a success fee on exit? If so, what has that looked like in your experience? What are your thoughts? The situation you describe is very familiar — especially today as the boomer generation prepares to retire. The most common method to do this is to structure an equity, or pseudo-equity, element in your contract.

Depending on the corporate and tax laws in your location, it may not be necessary to actually alter the share register to accomplish this. A contract to pay you a fixed percentage at the time of a liquidity event should be just as effective. The challenge, of course, is to agree on a percentage. Very good article and on point. Our structure always incorporates a min advisory or work fee and in some cases a min fee.

In building our database of private companies that have been sold to public strategic acquirers we have developed data on transaction fees, legal, accounting and valuation fees of several hundred of the transactions. The range of fees paid is surprising. If anyone is interested in this data, please contact us. If your mid size business owners are looking for top prices paid for private companies and who is buying whom, then visit http: I look forward to learning more.

How does the success fee work from the sell-side advisory point of view , if the purchase price is being paid in private stock of the buyer? I want to pay the advisor in the same currency I am getting for the company i. How do I pay my advisor in stock of options in a way that provides the full value of the fee to my advisor without triggering a tax for him b4 he is able to liquidate for cash?

In part for the point you make about cash, but also because it maximizes alignment between the shareholders and the advisor. Your point on tax is not as easy to answer. Agree with you on aligning objectives. Just struggling with the tax issue. Unfair for him to have to pay taxes on private stock for successfully helping us with a transaction and then have the risk of being underwater for providing a valuable service. I think this is a very interesting discussion.

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The fees you mention seem to be on the high side for Europe. I believe in situations where the advisor has a clear edge not just a good reputation or network they might be reached. Success fee schemes where the percentage increases if the sales value becomes higher are often suggested. I used this both while I still worked at a large investment bank as in my current practice at B2CF.

What Will a Financial Buyer Pay?

Although I firmly believe that such schemes are the right way to go to push your advisor to go the extra mile, the problem for many clients is that they sometimes feel that if the price ends up above the high thresholds that this is not the work of the advisor but just general market movement or a wrong initial assessment and when the fees become very large this becomes difficult to swallow when they see it on paper.

One additional element to fee levels is whether a longer term relationship exists or can be created. Good advisors will value such relationship and will be willing to quote sharper prices. Finally, some key elements determining pricing are: I agree with your point about formulas where the success fee percentage increases above a certain valuation. The intention has merit, but the implementation is fraught with problems.

The Exit Strategy Handbook - The BEST Guide for Selling Your Business

Market changes can affect prices, but also how would the shareholders feel if management did something to significantly increase the value post engagement. I have a related question. I am selling my company now and a friend introduced me to an investment bank that he knew was purchasing assets in my industry. They are usually calculated as a percentage of the success fees. My rough suggestion is somewhere in the 0. Hi, it is also worth mentioning that incentive fees are more common place in the industry now based on my professional experience.

The challenge, in my opinion, is setting the value that the accelerated incentive starts to apply. This could be due to a change in the business, or a change in the micro market for similar companies. Basil, what a helpful post and thanks for all your previous responses; they were helpful to read through. I have a similar question to those that have already been posed: He hired a broker a year ago, and 2 weeks before closing the deal fell through.

I think the most important consideration is whether the CEO has recovered from the previous attempt. I am about to sell my company in the million range. I know and have relationships with the two buyers most likely to put in the highest bid. We try to take a fair look at the situation. Beauty is in the eye of the beholder and the range of pricing in buyer proposals can be truly amazing to our clients. It may be hard for some to believe that one buyer may be willing to pay double what another will pay but it happens. Someday I imagine the seller will win the bet and get the discounted success fee.

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We often offer a lower success fee if the engagement is limited to a few, predetermined prospective buyers. The differences in fees are shown in the table above. I feel strongly that it is not advisable to create a situation where the success fee changes depending on which buyer is ultimately successful. The advisor should be neutral and only motivated by which buyer is the best for the owners and the company.

It has been valuable information. I work as a wealth adviser at a registered investment advisory firm. My client has built a successful healthcare services company and is now interested in selling his business. From there, he wants my assistance in determining the appropriate adviser to hire. My client suggested that he compensate me a certain percentage based on the final sale price of the deal. However, as an adviser at an RIA firm, I am prohibited from being compensated on transaction based business. Do you have any thoughts on a prudent compensation structure that will compensate me for my time and the value I provide my client, as well as abide by the SEC guidelines?

Yes I agree with all the others postings; helpful information.