M&A Fees - What Is It, Benefits, and Strategies Included

Selling a company is one of the most important financial transactions you can undertake, and you want to avoid overpaying for M&A services or leaving money on the table.

Whether you are a serial entrepreneur with multiple exits or selling your business just once, it's best to work with experienced people with proven success to maximize the chances of a successful sale.

The catch is that reducing the strain of a business exit involves paying M&A fees. We'll learn the different types of fees and how to manage them.

But with Exitwise, you don’t need to strain your funds. We can help you select your dream team of M&A experts, such as accountants, attorneys, business appraisers, and investment bankers and also negotiate their terms and fees on your behalf. Reach out to us today.

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What are M&A Fees?

M&A fees are payments a business owner makes to mergers and acquisitions experts for their service in managing and facilitating a business sale transaction.

Depending on your experience, expertise, and unique needs, such payments cover strategic advice, guidance the experts offer you, identifying potential buyers, negotiating the terms of the deal, and closing the sale.

The average M&A fees range between 1% and 5% of the transaction value.

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Types of M&A Fees

Mergers and acquisitions fees (M&A advisory fees or M&A advisor fees) are part of the overall M&A costs, including valuation, legal, investment banking, accounting, exit planning, and post-merger integration costs.

Here's a tabular presentation of the different types of fees and what they mean:

Types

Description

Retainer fees

These are fixed amounts you pay upfront as the business owner to ensure your commitment to the process.

They cover the initial costs of the M&A process. You can pay them one time upfront, monthly, or by milestones.

Success fees

These are paid once the deal closes, usually against the overall value of the transaction.

They can be fixed, a flat percentage, or a percentage increasing with deal size. Some are a percentage decreasing with deal size, using the Lehman fee structure*.

Commitment fee/Work fee/Engagement fee

Some M&A advisory firms or experts charge a one-time fee for their efforts to sell your company, whether or not the deal succeeds.

Breakage fees

The fees you pay when a transaction reaches an advanced stage but falls through.

It’s usually a deposit based on the expected selling price.

*The Lehman fee structure or formula is a common method for determining the compensation a business seller owes an investment bank or M&A broker for arranging and managing a transaction.

Originally, the formula applied a 5-4-3-2-1 tier system to business sales exceeding $1 million. The percentage decreased from 5% for the first million, 4% for the second, 3% for the third, and so on.

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Factors Influencing M&A Fees

Mergers and acquisitions fees vary from one M&A advisory firm to another, based on factors such as:

• Complexity of the Transaction: Large deals are often complex and require hiring more people, which can lead to higher fees.
• Customization Needed: M&A teams often customize their services to meet the unique needs of each client and transaction, resulting in variable pricing.
• Geographic Location: Different regions have varying regulatory requirements and market competition, which can lead to lower or higher M&A fees. For example, a rural setting would attract lower fees than an urban area with many businesses.
• Business Type: Small businesses typically attract lower fees because they have simpler structures and financial outlooks. Larger firms attract higher fees to manage their complex financial arrangements and operations, which require extra diligence.

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Common Mistakes to Avoid when Dealing with M&A Fees

As mentioned, how you handle M&A fees is important. You'll want to get them right to ensure you get good value for what you pay.

Here are common M&A fees mistakes to avoid:

• Working with a Firm that Changes its Fees: If a firm lowers its fees to work with you, it means the second price is its bottom line, and the first one is just a higher profit margin. The higher price might indicate exploitativeness.
• Failure to Negotiate the Success Fees Upfront: M&A advisory firms keep their fees private to remain competitive during the initial conversation stage with a seller who might be talking to other firms. However, ensure you ask and negotiate the success fee to manage expectations and avoid post-M&A misunderstandings.
• Working with a Firm that Insists Only on a Success Fee: While it might seem counterintuitive, it's best to work with M&A experts who combine different types of fees to spread your risk. For example, a firm charging a success fee only might hurry you into a deal without your best interests at heart just to get the fee.
• Failure to Pay the Fees as Agreed: If you don't pay the retainer fees on time as agreed, the firm will not see your commitment, and you will not capture their dedication and availability from the onset.

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5 Strategies to Optimize M&A Fees

When selling your business, you'll want to reduce and optimize your fees for M&A services to maximize the finances you get from the sale.

Here are strategies you can use:

1. Educate Yourself and Your Team on Your Own: Learn everything you can about the M&A process on your own and teach your team to reduce the billable time experts spend educating you. Firms charge you more if they have to teach you more if you are less experienced regarding mergers and acquisitions.
2. Negotiate Fees Upfront: Conduct thorough due diligence on all the possible fees and negotiate with your chosen firm or experts to ensure transparency and easy budgeting.
3. Be Involved as Much as Possible: It’s easy to give total control to the M&A team you hire. However, your involvement can help you get the maximum value for your expenses because you can keep a check on the billable hours spent and the corresponding outcomes.
4. Assess Your M&A Team’s Value: Analyze the total value your chosen selling team will add to determine whether their fees are reasonable. Ask past business owners who have worked with the firm if they feel they got value for their money.

If the team can secure a solid buyer, get you a great deal at maximum value, and help you navigate various business sale loopholes, you can be assured of their value.

5. Thoroughly Prepare Your Business for Sale: If you are paying retainer fees based on milestones, prepare your business thoroughly to reduce the overall M&A costs.

For example, audit your financial statements and mitigate risks in time to avoid prolonging the process because of the extra due diligence.

Even with these fee optimization strategies, you’ll still need the help of an M&A advisor to smoothen the exit process even more. Let’s see why you should hire an advisor.

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Why Hire an M&A Advisor

Hiring an M&A advisor is crucial for several reasons:

• They Allow You to Run the Business: Since M&A advisors are the primary contact with potential buyers, you have more time to focus on running the business and maximizing its value before the sale.
• They Protect Confidentiality: Interacting with potential buyers directly increases the risk of sensitive information falling into the wrong hands. M&A advisors can protect such information during the sale, releasing only what's very necessary to potential buyers.
• They Help Maximize Your Financial Benefits: M&A advisors structure deals so that you get the best sale price possible that aligns with your strategic objectives. They also work with tax accountants to ensure you reduce taxes on the business sale.

When you connect with us at Exitwise, we help you find and manage your dream M&A advisors and other experts who ensure you get the best sale price. We also negotiate with the M&A experts to optimize their fees so you keep more money from the sale.

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Frequently Asked Questions (FAQs)

Here are answers to questions about M&A fees:

Are M&A Fees Tax-Deductible?

Depending on the timing and nature of the services, you may be able to deduct M&A fees from your federal income tax.

The revenue/capital analysis determines whether sell-side expenses are expenses of management or capital in nature. If you can show that you incurred the fees to be able to decide if you'll sell the business, then you have a higher chance of deductibility.

If the expenses were incurred when you had already decided to sell your business, even before you identify a specific buyer, they are capital in nature and thus can't be deducted from your taxable income.

You can talk to us to find a reliable tax accountant who can help you navigate the complexities of business sale taxes.

How Much Do M&A Consultants Charge?

The typical M&A fees are 1% to 5% of the deal's transaction value. Notably, the exact rate depends on many factors, including the deal's complexity and size.

Generally, smaller deals result in higher percentage fees. Larger deals attract lower percentage fees, but the absolute amounts are higher. If you are a mid-market company, you'll likely pay 3% to 5% as a success fee.

Are There Any Alternatives to Traditional M&A Fee Models?

Most M&A experts use the Lehman Formula as the standard for fee structures. However, experts may use different variations of the formula, such as decreasing percentages against each million dollars in the transaction value.

Alternatives to traditional M&A fee structures are rare, but you can always talk to your sell-side experts to understand the fees clearly.

For example, in addition to other fees, you may agree on a percentage-based incentive fee that increases over a certain transaction value threshold. The fee incentivizes the M&A team to maximize value for the business seller.

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Conclusion

Whether you are a serial business seller or just starting in business sales, navigating M&A fees can be a headache.

But it doesn't have to be that way when you work with Exitwise, where we’re determined to put your business interests first before everything else.

We help you hire and work with your dream M&A team and also negotiate their fees and terms on your behalf. Reach out to us today to find experts ready to champion your business interests and maximize the transaction value.