What is an M&A Advisor Worth to You?

By Generational Equity


The old saying goes: You get what you pay for!

This is absolutely true when it comes to hiring an M&A team like Generational to represent you in the market. Can you sell your business on your own with no professional representation? Of course you can – it happens all the time.

However, history is littered with deals that close that are less than optimal for the seller. Either the price is too low, the terms and structure are awful, and/or you get stuck with an earn-out that is impossible to meet; all of these scenarios cause you to look back later and realize that you most likely left thousands (if not millions) of “chips on the table”.

For these reasons (and many more) we highly advise business owners to not go cheap when it comes to monetizing their largest asset.

Recently the highly respected company Firmex published a study on standard fee structures in the middle-market M&A arena. The study was in-depth and quite comprehensive. Entitled “M&A Fee Guide 21/22”, Firmex partnered with Axial to produce a great study. Here are a few of their findings:

It is the first time we’ve asked these questions when the overall economy and the market for many mid-sized companies was so uncertain. The COVID-19 pandemic has buffeted businesses from all sides: travel restrictions, retail shutdowns, work at home orders, masking requirements, labor shortages, vaccine mandates, and inflation fears to name a few.

Amid this turmoil, merger and acquisition advisors in the Americas serving the middle market say that deal flow is returning after a slowdown in 2020. Throughout this period, our survey shows they see very little pressure to cut their prices. Indeed, the survey suggests that if anything, fees are rising somewhat.

I would speculate that fees are rising for two reasons: More demand from sellers to get help moving on AND the reality of our times and the new normal – experts are in demand especially in M&A, now more than ever!

So that raises the question: What fees can you expect to pay when you engage with an M&A advisor? Firmex/Axial found:

Five out of six advisors charge a fee for their effort to sell a business that is payable whether or not a deal is consummated. These are often called work fees, engagement fees, or simply retainers. The most common (42%) structure for work fees is a fixed amount. Monthly retainers are the second most common structure and increased to 35% of advisors in the survey from 25% last year. Only 9% of advisors charge hourly work fees. While the survey data reveals a broad mix of retainer fees, it’s highly correlated with transaction size in our experience. As such, the higher the transaction value, the higher the retainer fees will be.

So based on the Firmex/Axial research, fully 77% of intermediaries in the middle market charge a commitment fee of some sort. Of course, this makes sense given the tremendous amount of prep work a firm has to undertake in order to create documents that are accurate and believable to buyers.

One of the reasons we have been so successful over the years is that our experienced team of valuation and deal making professionals are highly skilled and experienced in determining value, developing growth strategies, and walking with the business owner and his family along the exit journey.

As I said at the outset, you get what you pay for. Past success is a credible and authentic predictor of future success. We have the track record to prove it. Here is what a few of our clients say about our work:

And of course, success is the final goal and the ultimate ROI:

The common theme if you listen to these folks is that the commitment fee was well worth the price of admission, worth every penny in fact (good news: except in CA the commitment fee is fully refunded from the success fees at the close of the transaction – we adjust our success fees in CA to account for this). And as for success fees:

Advisors are split evenly about how to structure their success fees. Roughly two out of five use a scaled percentage that increases when the purchase price exceeds a set threshold. Another two out of five use a flat percentage rate. The remainder use what’s known as the Lehman formula, or something similar, in which the percentage of the fee declines as the deal size increases. The share of advisors using each success fee structure didn’t change significantly over the last year.

FYI, Generational uses what is called the “double Lehman formula” to calculate its success fees. Generally, as the sales price goes up, the percent paid goes down.

So, the bottom-line as I see it is this: You can try to find a buyer on your own and hope for a good deal (or one that even closes) or you can INVEST in your business by hiring a professional advisory firm that helps take your business to the next level and be there throughout the entire process.

This truly is probably the most important investment you can make in your future (and your company) right now. Don’t go cheap, fees are a reality. As Firmex/Axial have proven, the vast majority of firms require some form of commitment fee and success fees when the deal closes. You can calculate the ROI all the way to the bank!

PS – If you want to hear more from our clients you can do so here and here.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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