How Does An M&A Advisor or Investment Bank Get Paid?
Gain insights into retainers, success fees, fixed fees, minimum fees, and performance-based ratchets to understand how we align our interests with yours for a win-win solution.
As a boutique M+A advisory firm, our primary goal is to assist clients in navigating the complex landscape of mergers and acquisitions while maximizing value and achieving their strategic objectives. In this article, we will delve into our fee structure, shedding light on the key components: retainers, success fees, fixed fees, minimum fees, and performance-based ratchets. When considering whether a fee structure fosters alignment, the two specific financial aspects of the structure that you should consider are both the retainer and success fees. By providing detailed explanations and insights, we aim to foster transparency and help clients make informed decisions when engaging our services.
Fixed, One-Time Retainer Fee
A retainer fee is an upfront payment made by the client to secure our services and cover the initial costs associated with the transaction. This fee is typically calculated based on the scope of work, complexity of the deal, and the anticipated time commitment required from our team. Some banks will charge an ongoing monthly retainer fee. The issue with this model is that it creates an opportunity for a bank/firm to unnecessarily prolong their engagement with you for added fees. For example, if the firm thinks that there is not likely to be a successful transaction, it is in its economic best interest to “stall” the process to capture additional retainer payments.
At Katalyst Point, we charge a fixed, one-time retainer fee at the beginning of our engagement, the term of which is perpetual but can be terminated at any time by the client. A fixed retainer fee provides a foundation for our engagement and enables us to commence work on a transaction promptly. In our case, the retainer fee covers initial costs such as due diligence, financial analysis, market research, and other preparatory activities, required to position the deal for success. By charging a fixed retainer fee, we demonstrate our commitment to the client and ensure the necessary resources are fully allocated to their transaction from day one.
Mergers, Acquisitions, Asset Divestitures, and Business Sales
Depending on the complexity and duration of the transaction, our one-time retainer fees for mid-sized M+A transactions typically range from $100,000 to $150,000. For smaller deals, the retainer fee may be at the lower end of the range, while for larger, more complex transactions, it can be significantly higher than $150,000.
Private Capital Solutions: Equity Raises and Sourcing Debt
Some advisory firms may request a retainer fee based on a percentage of the funds they aim to raise. For example, they might request a retainer of 0.5% to 2% of the targeted capital amount in addition to a success-based fee. This percentage can vary based on the complexity of the fundraising effort. At Katalyst Point, we prefer a fixed upfront retainer that typically ranges from $15,000 per month to $30,000 or more; capped at a pre-determined interval of four to six months.
While some brokers or investment banks may not charge retainer fees for capital raises, there are both pros and cons to consider. The benefit for clients is that they can conserve cash flow by not paying upfront fees. However, it can lead to misaligned incentives, potentially resulting in less commitment and effort from the advisor. At Katalyst Point, we only work on an exclusive basis and opt for a retainer fee structure to ensure a high level of commitment, resource allocation, and dedication to the success of our clients' capital raise endeavors. This approach fosters a true partnership and emphasizes the mutual interest in achieving optimal results.
Strategic Advisory Services: From Valuations to Value-Creating Advice
Strategic advisory services are often provided on a project or hourly basis. The fees for these services can vary widely based on the scope of work, the complexity of the valuation, and the expertise required. Here are some general estimates:
Financial Modeling: For financial modeling and analysis, our hourly rates can vary widely but often fall in the range of $500 to $750 per hour.
Business Valuation: Business valuation services may cost anywhere from $15,000 to $100,000 or more, depending on factors such as the size and complexity of the business, the purpose of the valuation, and the methods used.
Asset Valuation: Asset valuations, such as valuing intellectual property or specific assets within a company, can range from a few thousand dollars to tens of thousands of dollars.
Targeted Acquisition Advisory: Our acquisition advisory service is designed to deliver exceptional value as an outsourced corporate development function. We typically employ a monthly retainer fee structure for this service in the range of $3,000 - $6,000, which serves as a critical component in creating alignment and commitment between our team and our clients’ in-house team. This retainer not only underscores our dedication to the client's goals but also enables us to dedicate the necessary resources, conduct in-depth research, and deploy our expertise to identify and evaluate acquisition opportunities that offer the most potential for synergistic growth.
Value-Creation Advice: We’ve seen the playbook for value creation more than once, and advise clients on how their decisions throughout their business life cycle can impact exit value. Our bankers closely watch emerging trends and enjoy a unique view of the attributes that industry players seek in their acquisition targets. The fixed-retainer fees for these services can vary based on the level of expertise required and can range from $5,000 per month to $20,000 or more per month, for relatively straight-forward businesses to complex businesses in highly dynamic industries, respectively.
Performance-Based Success Fee
In addition to the retainer fee, the success fee is a performance-based payment that is contingent upon the successful completion of the transaction. This fee structure aligns our interests with the client's objective of achieving a favorable outcome. At Katalyst Point, the success fee is usually calculated as a percentage of the transaction value, or a predetermined formula agreed upon in advance. It incentivizes our team to work diligently and effectively to quickly secure the best possible terms and highest enterprise value for our clients.
What is the typical rate for a success fee?
The typical rate for a success fee varies depending on several factors, including the complexity of the deal, the size of the transaction, status of the company financials, industry dynamics, geographic location, and the level of involvement required from our team. Success fees are usually structured as a percentage of the transaction value, with industry benchmarks ranging from 2% to 5% for capital markets advisory and 2% to 10% for M&A transactions.
At Katalyst Point, we firmly believe in tailoring our services to meet the unique needs of every company we collaborate with. That's why we don't adhere to a standard rate card at given valuation hurdles. We understand that different companies embark on distinct paths towards their optimal valuation. By setting a universal rate, we risk creating misalignment and hindering the progress of companies with exceptional potential yet requiring additional resources to achieve an outstanding valuation.
Layering in value creation alignment
As the founder and owner, your primary concern is not the intricate details of the journey towards a better outcome; instead, what you truly desire is a superior outcome itself. At Katalyst Point, we understand this perspective. Our experienced bankers possess invaluable foresight and a deep understanding of the market. With their expertise, they can foresee which companies will require that extra push to attain extraordinary outcomes. To further align our interests with the client's objectives, we utilize performance-based ratchets. These mechanisms ensure that our success fee is commensurate with the value we help create during the transaction process. Performance-based ratchets are structured to adjust the success fee based on specific milestones, such as achieving higher valuation multiples (e.g., going from $100M in transaction value to $120M) or securing more favorable deal terms. Consequently, we structure our fees in a way that genuinely reflects these differences. By incorporating ratchets, we foster a results-oriented approach that emphasizes value creation and ensures mutual alignment between our clients and our bankers.
To determine a specific success fee, our expert bankers follow a meticulous process that encompasses evaluating your business within the market landscape and relevant buyer universe. They thoroughly analyze the pathway towards attaining an optimal valuation and based on this assessment, carefully structure their fees to align with the resources necessary to achieve that desired outcome. By adhering to this comprehensive approach, we ensure that our fee structure is tailored to your unique needs and reflects the true value we bring to the table.
Frequently Asked Questions (FAQs)
Q: What happens if a deal falls through?
A: If a deal falls through due to circumstances beyond our control, the retainer fee covers the costs incurred up to that point. We work closely with our clients to understand the reasons behind the failed deal and explore alternative strategies to move forward.
Q: Can the fee structure be customized for each client?
A: Yes, we understand that each client's needs and circumstances are unique. Our fee structure is flexible, and we are open to tailoring it to accommodate specific requirements and objectives.
Q: Why is negotiating the retainer fee not in the client's best interest?
Negotiating the retainer fee may not be in the client's best interest for several reasons:
Resource Allocation: The retainer fee is essential for Katalyst Point to allocate the necessary resources to your transaction. It covers initial due diligence, research, and other preparatory work. Negotiating it downward could result in reduced resources dedicated to your deal, potentially compromising the quality of service. Oftentimes, we are willing to take a pass if there is a mismatch between resource allocation and our ability to successfully deliver results.
Commitment and Priority: A higher retainer fee often signifies a higher level of commitment from the advisory firm. It signals that both parties are equally invested in the success of the transaction. Reducing/ eliminating the retainer may diminish our commitment and priority in your deal.
Risk for the Advisory Firm: Advisory firms take on risks when they commit to work on a client's transaction. Negotiating the retainer fee too aggressively might make the deal financially risky for the firm, which can affect the quality of service or lead to a conflict of interest.
Quality of Service: A reduced retainer fee might lead to a situation where the advisory firm is stretched thin across multiple clients, affecting the quality of service and responsiveness. It's in your best interest to ensure the firm has the necessary resources and motivation to deliver optimal results for you.
Complexity of Negotiations: Lengthy negotiations over the retainer fee can strain the client-advisor relationship from the outset. It's often more beneficial to focus negotiations on success fee structures, where there's more flexibility based on performance and outcomes.
While it's natural to want to negotiate fees to secure the best possible deal, it's important to consider the potential consequences of negotiating the retainer fee too aggressively. Maintaining a fair and reasonable retainer fee ensures that Katalyst Point can commit the necessary resources and expertise to your transaction, ultimately increasing the chances of a successful outcome.
Q: Are the success-based fees negotiable?
A: Yes, success fees are negotiable. We engage in thorough discussions with our clients to understand their goals, the complexity of the deal, and the scope of work required. Based on these factors, we work collaboratively to determine a success fee structure that aligns with both parties.
Q: What about minimum fee structures?
A: Minimum fees, sometimes imposed by advisory firms, can create misalignment between the interests of the client and the advisory firm. Imposing a minimum fee can result in situations where the advisor is motivated to close a deal quickly at a lower valuation, even if it may not be the most advantageous for the client. At Katalyst Point, we believe in fostering a true partnership with our clients, and therefore, we do not impose minimum fees.
Q: How are success-based fees typically structured for minority transactions?
A: At KPA, success fees for minority transactions are usually structured based on the specific terms and arrangements of the deal. While success fees in majority transactions (i.e., selling a business or buying a business) often correlate with the transaction value, success fees in minority transactions are often structured as a percentage of the equity or ownership stake being acquired. Since security structures can be engineered to increase valuation without economically benefitting the founders or owners, this approach ensures that the success fee is directly tied to the specific value and impact of the minority investment, aligning the interests of both the investor(s) and our client.
Q: What costs should I consider when planning to engage in a business sale?
A: When planning to engage in an M+A transaction, it's crucial to consider various additional expenses beyond the transaction itself. These expenses can include legal fees, advisory fees, and due diligence costs in addition to your banker’s service fees. To provide a rough estimate for selling a company, let's calculate the potential costs of hiring an advisory team, including an M&A attorney, a fractional CFO, and a Quality of Earnings (QoE) reviewing firm:
M+A Attorney Fees: M+A attorneys play a critical role in structuring and negotiating the deal, handling legal documentation, and ensuring compliance. Their fees can vary significantly depending on the complexity of the transaction and the hourly rates of the legal team. On average, M+A attorney fees for a mid-sized deal might range from $50,000 to $150,000 or more; initially paid as a small retainer and billed over time.
Fractional Executive Fees: A Fractional executive provides expertise during the M+A process, helping with financial due diligence, analysis, and strategy for companies who don’t have seasoned c-suite level executives. The cost of a Fractional CFO can vary widely, but for a mid-sized transaction, you might budget between $10,000 to $30,000 per month, depending on the level of expertise required and the duration of their engagement. The engagement typically spans several months oftentimes, prior to even considering a sale of the business.
Quality of Earnings (QoE) Reviewing Firm: QoE reviews assess your company's financial statements to identify potential risks and adjustments. The cost of a QoE review can range from $20,000 to $100,000 or more, depending on the complexity, detail, and size of the company.
Therefore, a client selling a $50,000,000 mid-sized asset-lite company should expect to spend approximately $250,000 to $500,000 or more. The below estimates do not factor in the success-based fee to be paid to the investment bank at closing which could range from 2% to 10%:
M+A Attorney Fees (6 months billable hours plus retainer): up to $150,000
M+A Banker Fees (6 months retainer): $150,000
Fractional CFO Fees (6 months retainer): up to $120,000
Quality of Earnings Reviewing Firm (billable hours plus retainer): $65,000 or more
Alternatively, a client seeking advisory services on a private capital raise of $50,000,000 should expect to pay a retainer of approximately $60,000 or more. In the case of a debt capital raise, the above applies in addition to the respective fees of the lending institution.
It's important to note that these retainer costs can vary widely based on various factors, including the specifics of the deal and the professionals' rates and expertise. They also don’t include the applicable success fees to be paid at closing. Therefore, it's crucial to obtain detailed quotes and estimates from your chosen advisors to create an accurate budget for your transaction. Note that what constitutes a "mid-sized" transaction can be subjective and may differ from one perspective to another. Some might consider a deal worth $50 million as mid-sized, while others might consider a deal of $500 million to fit within that category. The classification depends on the context and the industry standards.
Partner with Katalyst Point for Success
We enjoy working with our clients on an exclusive basis and are dedicated to delivering exceptional advisory services that drive successful and fast closings. Our transparent and flexible fee structure, which includes fixed retainers, performance-based success fees, and alignment mechanisms like ratchets, ensures that our interests are closely aligned with our those of our customers. Ultimately, a bank will earn its own fees by increasing a company’s enterprise value via a structured, competitive process. As an example, of our last 5 deals at Katalyst Point where our client had a term sheet on the table before we started working with them, we were able to add 40% to the enterprise value and 10.2x our fees. * For our debt and equity capital raising, we are known to secure better terms from private capital networks to include private credit lenders, institutional investors, and family office investors. When incentives are aligned and opportunity is there, both founder and advisor can benefit from an appropriate fee structure that is transparent and mutually beneficial.
Contact us today to learn more about how we can assist you in achieving your financial and strategic objectives.
*Note: Past results are not an indicator of future outcomes.
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