M&A Fee Data Used to be Scarce: The size and terms of fees that M&A advisors charge for selling a company has been a hot topic in the tech industry for decades. Until the decade of 2010, data was scarce, and largely unpublished. M&A advisors would furtively gather in dark corners at finance conferences to discuss fees, but they were guarding information more than sharing it. The lack of transparency led to wide disparities in M&A fees and how they were structured.
Data Now Available: In the early 2010s, articles started appearing in industry journals and posts on advisor websites capturing the range of fee structures and percentages. For the purposes of this article, we will focus on the technology industry and deal sizes between $10M and $100M. Here are examples of fees percentages:
- Published by M&A Source in A Summary of M&A Fees for Sell-side Transactions quoting data obtained from Divestopedia.
Success fees range as follows:
- Between $5 – 10 million: 4 – 6%;
- Between $10 – 25 million: 4 – 5%;
- Between $25 – 50 million: 2.5 – 4%;
- Between $50 – 100 million: 2 – 3%;
This data refers to all industries, not just tech.
Divestopia In their M&A Fee Guide 2018-2019 surveyed M&A advisors and determined that on average, they expected to receive fees as follows:
- Deal size of $10M – $20M: 2 – 4%
- Deal size of $50M: 1 – 2%
Published by iMerge in 2012: Retainer or work fee from $50k to $250k, plus a success fee:
- Deal Size $5 million to $25 million expect to be quoted a success fee of 7% to 4%
- Deal Size of $30 million to $100 million expect to be quoted a success fee 4% to 2%
Rosebiz in 2019: Success fees are 2% – 5% for technology companies less than $100M, but some can go as high as 6% – 8%.
This data demonstrates that there is a wide range in the M&A fees. Below we will discuss why some M&A advisors are able to charge higher fees.
Fee Structure: All the authors also point out that the structure of the fee as well as the quantum of the fee is highly negotiable. A typical M&A engagement fee in the technology industry includes the following two components:
- Work Fee: For technology companies below $100M, M&A advisors typically charge a Work Fee of between $25,000 – $75,000, paid monthly over a period of 6 to 12 months. The work fee accomplishes the following goals:
- It covers some of the up-front costs borne by the advisor in developing materials to market the company. This includes some of the opportunity costs of working with the company to understand their business and value propositions.
- It confirms that the company is serious about wanting to pursue an exit.
- It ensures that there is at least some recovery for the M&A advisor in the event that the exit does not occur. More on this below.
Usually, the work fee is credited against the Success Fee.
- Success Fee: The success fee is payable only if the company is sold. Fees for a $30M transaction with a 6% success fee would be $1.8M; a significant amount. A high fee is justifiable because the M&A advisor can invest two to four-person years in strategizing, preparing, marketing, negotiating and closing the transaction with the risk that even at the 11th hour, the deal could collapse, leaving the advisor with only a work fee for all of the time and energy invested. Strategic Exits’ anecdotal research suggests that the failure rate of technology exits less than $50M in size could be as high as 75%.
With this much money and risk on the table, the company and the M&A advisor often have a lengthy discussion on the structure of the engagement to optimally balance the risk and the reward. The advisor looks to hedge their risk by requesting more compensation up front, and not contingent, whereas the company wants to minimize its risk of spending significant sums if the sale does not close. Here are some of the items negotiated:
- Engagement or Commitment Fees: These are large up-front, non-contingent payments as the engagement begins. The company needs to be quite sure that the exit will close before agreeing to this type of fee. It is typically not found in technology exits due to the volatility of the sector.
- Minimum Success Fees: This ensures the advisor receives a minimum amount when the exit closes but suggests that the advisor is not confident of negotiating a rewarding price. Even in the volatile tech sector, a minimum success fee is rare.
- Sliding or Accelerating Success Fees: A sliding success fee pays the advisor a higher amount for the first several million dollars in transaction value and a lesser portion for additional value based on a sliding scale; similar to a real estate transaction. An accelerating fee is the reverse; paying more for each additional tranche of transaction value. A sliding scale is bad for the company as it does not motivate the advisor to negotiate the highest price. An accelerating scale motivates the advisor but can be unfair to the company if the target transaction price was under-estimated.
For these reasons, a success fee based on a fixed percentage of the transaction value is the best structure.
In a well-structured deal, only the work fee and success fee are required. The other components are weighted too heavily to the advantage of the advisor.
Although the fee structure (work fee and success fee) puts the company and the M&A advisor on opposite sides of the table, the payment terms are a component of the engagement where the company and M&A advisor can be better aligned.
- Some exits include a vendor take-back where a portion of the purchase price is paid later on a schedule with no conditions attached.
- Other transactions include an earnout clause in which the later payments are contingent on achieving milestonesi.
- All deals will include some form of hold back where the buyer retains a portion of the purchase price, typically 10%, to fund any remaining liabilities for which the seller is responsible.
- Some advisors expect to be paid their entire fee at closing, perhaps with a discount for fees earned on amounts paid to the seller after closing, particularly if awarded on an earnout.
- Other firms, like Strategic Exits Partners, believe that the M&A advisor should align themselves with the company to the greatest extent possible, and so take their fee only when the company receives their payment. Often this term is written into the purchase agreement.
- Some exits have a portion of the purchase price paid in shares of the buyerii. The tax and regulatory challenges make it difficult for the advisor to receive and sell equity. The advisor typically receives its fee in cash in lieu of shares.
Focusing on Fees Misses the Point – The Quality of the M&A Advisor is Everything
To this point, we have covered deal structure and fees. However, success fee percentages are a red herring. The goals in any exit transaction are to complete the exit transaction and on optimal terms for the seller. If the majority of exits do not complete satisfactorily, then the most important consideration in choosing an M&A advisor should not be the fee, but the likelihood that the deal will close.
The probability of a successful exit varies over a very wide range. Hard data or surveys on this dimension are hard to find, however, our experience suggests that the relationship between the quality of the exit advisor and the probability of close is as shown in the graph below:
The range is striking: the probability of a success exit varies from around 10% for low quality firms up to 75% – 80% for very high-quality firms – and is independent of the company being sold.
This leads directly to the second consideration: the selling price. The quality of the M&A advisor has a significant effect on the price you’ll likely receive, as shown in the graph below:
Again, the results are dramatic: the transaction price could vary over a range of plus or minus 50% depending only on the quality of the firm you select.
Based on these observations, a company should look primarily to the experience of the M&A advisor: a 70% chance of success on achieving an exit 50% above average with a 6% success fee leaves the company significantly better off than a 30% chance of a 50% below average price with a 3% fee. The fee is not the primary concern – but rather the biggest factor is the quality of the advisor.
How do high-quality M&A advisor distinguish themselves?
High-quality M&A advisors are more successful for a few related reasons:
- Experience and Capability: M&A advisors that have deep experience in the technology industry will have managed the challenges particular to tech: high growth, rapid chance, incomplete knowledge, immature management, etc. They can better relate to tech founders because they have “walked in their shoes”. Industry-agnostic advisors lack the specific tech experience and may be less likely to close and most likely, on less generous terms.
Advisors who have managed many exits can anticipate and ideally remove obstacles before they affect the exit.
- Hard work: Every M&A advisor will work with the company to craft a set of marketing documents, then contact the obvious buyers and try to negotiate the deal, then leave it to the lawyers to manage the diligence and closing documents. Gold Service advisors will do much, much more than that. Prior to starting the engagement, they will work with the company to prepare and organize the documents needed for due diligence. Some firms are willing to work with the company CEO for many months, and sometimes years, to increase the fundamental value of the business. They will uncover sources of value that others will miss which help to increase the sale price. They will scour the planet looking for every potential acquirer that might value the technology more. In sum, anywhere they can add value and expedite the transaction, the M&A advisors will be there. These Gold Service advisors are the ones most likely to deliver results in the top right corners of the graphs.
To put this difference in perspective, Gold Service firms that add a lot to the fundamental value probably invest about two-person years of professional time in a typical exit. Lesser quality firms might put in one quarter to one half of that – around one half to one-person year of senior time.
Conclusion: Keep Your Eye on the Prize
M&A advisors earn their fees for helping tech entrepreneurs sell their companies. The fees compensate them for the risk that a transaction can take considerable time and effort over many months with no guarantee of success. Highly-skilled and experienced M&A advisors can make a significant difference in the probability that the deal will close and achieve the highest value.
Tech companies contemplating an exit should focus more on the quality of the advisors and less on the fees they charge.
i Strategic Exits Partners strongly discourages including any form of earnout because it creates a conflict between the buyer and seller; the seller trying to maximize performance post close to increase the purchase price, and the buyer motivated to do the opposite. While the conflict may be more apparent than real, it is a discussion you never want to have.
ii Strategic Exits Partners advises its clients to avoid payment in shares. If the buyer is a private company, the shares cannot be sold. If the buyer is publicly traded, there is typically a hold period which can last from 1 to 3 years during which the shares cannot be sold. For these reasons, equity should be avoided. If there is an equity component in the purchase price, it should be heavily discounted.