In our last blog post, we highlighted the benefits of retaining an investment banker for the sale of your family-owned business. As you might expect, investment bankers do not work for free. In today’s blog post, we outline the typical fee structure for a middle-market investment banking firm that you might retain in the sale of your business.
Investment bankers typically charge a success fee or transaction fee, along with a retainer fee. The success fee is usually a percentage of deal value. The deal value includes the amount of cash and the fair market value of securities or other assets that you receive in the sale (and would include, for example, the amount of debt of your business that is assumed or paid off by the buyer at closing). Deal value also customarily includes the amount of any installment note payments, releases from escrow, or earnout payments made by the buyer after closing, but you should not pay a success fee on post-closing payments unless and until the payments are actually made by the buyer.
The percentage of deal value may be fixed (such as 2 percent or 3 percent), but can also be structured as an adjustable, formula-based success fee where the percentages change at certain amounts or “break points.” For example, the success fee might be structured as 1.5 percent for deal value up to $20 million, 2 percent for the portion of deal value in excess of $20 million up to $30 million, and 3 percent for any portion of the deal value in excess of $30 million. The success fee is typically subject to a minimum fee that the investment banker must be paid at the closing. In our experience, the minimum success fee usually required by experienced, middle market investment bankers is $500,000-700,000.
Investment bankers try to lock in the success fee and protect themselves against your terminating their engagement before the closing occurs. The engagement letter will likely include a “fee tail” period that remains in effect for nine to 12 months after the engagement is terminated. If you terminate the engagement before closing and then later complete a transaction on your own (or with another investment banker) during the fee tail period, you will still owe the success fee to the first investment banker. You may be able to negotiate certain exceptions to the fee tail. For example, the investment banker may agree that the fee tail applies only to buyers that the investment banker contacted about the deal during the engagement.
Investment bankers customarily require payment of an up-front retainer fee when the engagement begins. The retainer fee is generally non-refundable, but should be credited against the success fee due at closing. In our experience, the typical retainer fee ranges from $50,000-100,000 in middle-market transactions. You will also be required to reimburse the investment banker for out-of-pocket expenses.
While the success fee, the retainer fee, the fee tail period, and the expense reimbursement are common elements in almost every engagement letter, you should remember that the dollar amounts, percentage amounts, break points and many other terms in the engagement letter can and should be negotiated. If properly structured, the engagement letter terms will motivate the investment banker to help you achieve your goals in the sale of your family-owned business.