Recently, Firmex and Divestopedia reported on a jointly conducted survey that looked into the M&A fee structures. As there is little public data on this topic, the results shone a light into a traditionally opaque space within the market.

Choosing the right advisory for small-to-medium owners

For small-to-medium enterprise owners, one major implication from the survey is that the smaller your business’ price tag, the larger your fees will be on a relative basis. This makes sense, as M&A advisors would need to be properly compensated for their work, but there are ways to ensure you maximize the net amount you will take home from selling your business. First, most obviously, would be trying to minimize the fees you’re charged. This can be accomplished in several ways, the most straightforward of which is to simply shop your business around and see what various M&A advisory firms would charge for their services to a client of your size. The results from the survey indicate that the spread of success fees is the widest for price tags in the $5 million and under range. Given that the difference between a 3% success fee and a 6% success fee for a $5 million sale is $150,000, it’s clear that this can definitely be worth your while to look into.

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First, most obviously, would be trying to minimize the fees you’re charged. This can be accomplished in several ways, the most straightforward of which is to simply shop your business around and see what various M&A advisory firms would charge for their services to a client of your size. The results from the survey indicate that the spread of success fees is the widest for price tags in the $5 million and under range. Given that the difference between a 3% success fee and a 6% success fee for a $5 million sale is $150,000, it’s clear that this can definitely be worth your while to look into.Of course, this can be something of a double-edged sword, depending on why a lower fee is being priced as such. After all, everyone has been guilty of finding something for a “bargain” only to find out exactly why its price was so heavily discounted, and the realm of mergers and acquisitions is no different. For this reason, it is absolutely critical that, when looking into advisors, you look into more than just the fees being charged. Be sure to check out the firm’s background with respect to their deals, and ask lots of questions. How quick is their turnaround time on deals? What do their clients think of their service after the fact? Do they know your industry well? These are all important questions you’ll want answers to before settling on an advisor. Remember, you want to make sure you’re getting a fair price, both as the seller of the company and as a client to the advisor. It’s a much better deal to pay an extra 3 percentage points for a success fee if it the advisor is going to get you a sale price 10% higher.

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Lower fees can be a double-edged sword

Of course, this can be something of a double-edged sword, depending on why a lower fee is being priced as such. After all, everyone has been guilty of finding something for a “bargain” only to find out exactly why its price was so heavily discounted, and the realm of mergers and acquisitions is no different. For this reason, it is absolutely critical that, when looking into advisors, you look into more than just the fees being charged. Be sure to check out the firm’s background with respect to their deals, and ask lots of questions. How quick is their turnaround time on deals? What do their clients think of their service after the fact? Do they know your industry well? These are all important questions you’ll want answers to before settling on an advisor. Remember, you want to make sure you’re getting a fair price, both as the seller of the company and as a client to the advisor. It’s a much better deal to pay an extra 3 percentage points for a success fee if it the advisor is going to get you a sale price 10% higher.

Flexible fee structures help avoid upfront costs

The report also mentions the prevalence of time-based retainer fees, wherein a client pays the advisor monthly, in lieu of a fixed fee. These fees tend to be lower up-front and, as such, can serve to lower your overall fee burden when selling your company – if you’re prepared, that is. Not being ready for the sale process means due diligence and valuation work can drag on for a considerable period, and a subscription model for retainer fees will quickly eat into your net gain from the sale.With this in mind, to keep retainer fees low, be absolutely sure your company’s books are in order. This is a consistently common pitfall for smaller enterprises, as keeping the business running and growing takes considerable amounts of both time and energy, and certain administrative tasks slip. Nonetheless, not only are knowing your business’ numbers inside-out and ensuring your books are all correct vitally important, but absolutely crucial is making sure everything is organized. The due diligence process by its very nature will entail going through your business with a fine-toothed comb and making that easier will be greatly expedient.

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Get your company’s books in order first

With this in mind, to keep retainer fees low, be absolutely sure your company’s books are in order. This is a consistently common pitfall for smaller enterprises, as keeping the business running and growing takes considerable amounts of both time and energy, and certain administrative tasks slip. Nonetheless, not only are knowing your business’ numbers inside-out and ensuring your books are all correct vitally important, but absolutely crucial is making sure everything is organized. The due diligence process by its very nature will entail going through your business with a fine-toothed comb and making that easier will be greatly expedient. None of this is to say that flat fees are out of the question. On the contrary, for inexperienced sellers, they may provide much better bang for their buck, particularly if they are unprepared for such an undertaking. While they, of course, require a larger cash commitment up front than their recurring brethren, a flat dollar fee will inherently mean that the time for preparatory work to be done will be less of a concern. It’s up to you, as the business owner, to decide which structure would be in your best interests.

Flat-fees are still best suited for some types of sellers

None of this is to say that flat fees are out of the question. On the contrary, for inexperienced sellers, they may provide much better bang for their buck, particularly if they are unprepared for such an undertaking. While they, of course, require a larger cash commitment up front than their recurring brethren, a flat dollar fee will inherently mean that the time for preparatory work to be done will be less of a concern. It’s up to you, as the business owner, to decide which structure would be in your best interests.

M&A Firms come in all shapes and sizes

There’s also a decision to be made with respect to what size of advisory firm best fits your needs. Implicit within the survey results is the distinction between larger regional or bulge bracket investment banks, and smaller boutique firms. Traditionally, the prestige of working with a global bulge-bracket firm (or even a large regional player) has been absolutely unrivaled. However, they may not represent the best value for your business and, depending on your size, may be completely out of reach anyway. Larger firms tend to have industry-specific teams, but in general are considerably less focused than smaller players. Also, you’ll represent a smaller piece of their revenue pie, so you run a very real risk of lower quality of service when working with them, in terms of attention paid to your individual concerns.

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The heft and resources of large firms

On the flip side, large investment advisory firms have considerable heft and resources to throw around, which can be a major help for speeding along the valuation process. Additionally, their list of contacts, and therefore potential buyers, is considerably larger, so they may be able to find a suitor for your company with greater ease than a smaller player would. Boutique firms obviously come without the deep pockets of their mega-cap brethren but aren’t necessarily small players in the space. After all, the secretive Allen & Co and tech-focused Boutique firms obviously come without the deep pockets of their mega-cap brethren but aren’t necessarily small players in the space. After all, the secretive Allen & Co and tech-focused Qatalyst are both considered to inhabit the boutique space, but regularly play in the big leagues. Most competitors in this space tend to have a higher focus on a particular industry. Some, like Qatalyst, may stick to the technology sector, while others would work with industrials or biotech or retail-oriented firms. With a smaller headcount and less overhead than a large firm, boutique advisors can also afford to be more flexible with the fees they charge. A three or five-person shop, for example, can afford to work on a relatively small number of deals compared to a large bank, but still provide top quality service. In fact, many boutiques make that their selling point, holding themselves out as providing a more personal touch. You can also rest assured that you’re more likely to get the firm’s big fish working on your deal personally. And, as the proliferation of boutique firms continues, many very capable M&A advisors are willing to take on these roles with smaller firms. Of course, it’s up to you to find who you’re most comfortable dealing with in these situations.

The flexibility and service of boutique

With a smaller headcount and less overhead than a large firm, boutique advisors can also afford to be more flexible with the fees they charge. A three or five-person shop, for example, can afford to work on a relatively small number of deals compared to a large bank, but still provide top quality service. In fact, many boutiques make that their selling point, holding themselves out as providing a more personal touch. You can also rest assured that you’re more likely to get the firm’s big fish working on your deal personally. And, as the proliferation of boutique firms continues, many very capable M&A advisors are willing to take on these roles with smaller firms. Of course, it’s up to you to find who you’re most comfortable dealing with in these situations.Clearly, fees are going to play a large part in any deal-making process – entire industries revolve around them. Knowing how to get the most out of them will ensure you get not only the best price for your company but that it will continue to succeed even after you’ve handed over the reins to a new owner.

Clearly, fees are going to play a large part in any deal-making process – entire industries revolve around them. Knowing how to get the most out of them will ensure you get not only the best price for your company but that it will continue to succeed even after you’ve handed over the reins to a new owner.

For more information on M&A Advisory, Fee Structures read our report Merger and Acquisition Fee Guide: Industry Results and Findings