The 2017 M&A Fee Guide

The 2017 M&A Fee Guide

The 2017 M&A Fee Guide

Corporate advisory on Mergers and Acquisitions (M&A) is indisputably one of the most lucrative ventures. Have you ever wondered why and how these firms structure their M&A fees? Well, this has been one of the most difficult questions to crack down. Without baseline guidance on these fee structures, it’s usually challenging to both the clients and M&A professionals- clients don’t understand why they are asked to pay whatever amount and it’s sometimes difficult for M&A professionals to determine their fees. 

But these questions were well covered by a comprehensive second annual M&A Fee guide conducted by the Divestopedia and Firmex. The groundbreaking guide provides a global perspective on M&A fees from data collected from 471 bankers and advisors. The survey aimed to provide greater transparency into average fee structure, what’s being charged and why. 

Overview and Methodology 

In 2016, Firmex and Divestopedia carried out their first study which was widely received by the market. Being the first-ever survey of its kind, it was definitely a major milestone for the industry. Based on the last years’ experience, this year guide was able to provide a wider scope of the market focusing on a broader geographical perspective. The survey which ran from May to August 2017 interviewed a total of 678 respondents. But for precise finding, they narrowed down to real deal makers (Investment Bankers and M&A Advisors) bringing the total of respondents to 471. Key Questions 

To help extract factual finding, Firmex and Divestopedia drafted some key questions that would help them extract the information from the respondents. Here are the set key questions that helped in putting together the guide; 

Deal Flow & Value

When the respondents were asked how many deals their firms worked on in the average year, the responses were significantly varied. From the survey, 42 percent reported working on 1-5 deals annually, 28 percent 6-10 deals, 11 percent 11-15 deals, 17 percent over 16 deals each year while 2 percent reported less than one full deal per year. The report also points to the rapid growth of boutique investment banks which reported less than 10 deals per years. The guide estimates, firms completing a large number of deals are likely to be part of a bulge bracket firm or a larger regional investment bank. 

Minimum Transaction Value 

Although about 37% of the respondents’ minimum deal size they work on is less than five million dollars, the response decreased gradually as the deal size grew. This was an indication that most respondents conduct small size deals more frequently. What does this tell us? Whereas high-end media reports are reporting deals worth billion, the real players in the industry are small and mid-market. In fact, only 4% of the respondents hit 100 million deals; the rest (96%) reported less than 100 million deals. 

Success Fee Structures 

These are fees charged upon the successful closing of the deal. The M&A fee guide shows lack of a common methodology to determine these fees. A majority of the respondents (I.e., 45%) used scale percent formula, 28% simple percentage, whereas 18% used a Lehman formula or close variant. Although all methods are effective, there is always a small variation. The survey also noted that as the deal’s value increased, the success fee decreased relative to the deal value. 

When Success Fees Typically Paid? 

According to the survey, most of the payments are paid date later than the closing date. These payments include holdbacks, vendor financing and earn-outs amongst others. Another question that interestingly came out is the relationship between work fees and the success fee. From most respondents, they charge non-refundable work fees or retainer fees upfront. 

When as asked of the success fee should be reduced, the opinion was split right down at the middle with 53% saying yes. Other question that formed the basis of this survey included forms of purchases prices, fee tail period, and sharing the spoils (success fees) with other advisors and they are extensively discussed in the report. 

The key Findings of the Survey: 

First, the M&A fee guide found that the success fee varies by different region and major cities. For example, the survey found that for a $50 million deal, US Pacific charged 2-4% whereas in the US North success fees are 1-2% for the same size. This shows that local market dynamics are crucial while determining the fees. 

Secondly, the fee structure that aligned banker’s interests with sellers, for instances where both parties are rewarded for a higher total deal value, appear more prevalent in the market. In fact, 45% of the respondents indicated that a scaled percentage success fee is used in the engagement structures. 

Third, there is no standard definition of what constitutes purchase price in a deal upon which a success fee is calculated. The survey also pointed out that there is no industry alignment on the timing of when a success fee is paid. A huge of respondents (i.e., 76%) includes the earn outs in the success fee’s calculations.

Full Report: 

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