In our last blog post, we highlighted the benefits of retaining an investment banker for the sale of your family-owned business. As you might expect, investment bankers do not work for free. In today’s blog post, we outline the typical fee structure for a middle-market investment banking firm that you might retain in the sale of your business.
Investment bankers typically charge a success fee or transaction fee, along with a retainer fee. The success fee is usually a percentage of deal value. The deal value includes the amount of cash and the fair market value of securities or other assets that you receive in the sale (and would include, for example, the amount of debt of your business that is assumed or paid off by the buyer at closing). Deal value also customarily includes the amount of any installment note payments, releases from escrow, or earnout payments made by the buyer after closing, but you should not pay a success fee on post-closing payments unless and until the payments are actually made by the buyer.
The percentage of deal value may be fixed (such as 2 percent or 3 percent), but can also be structured as an adjustable, formula-based success fee where the percentages change at certain amounts or “break points.” For example, the success fee might be structured as 1.5 percent for deal value up to $20 million, 2 percent for the portion of deal value in excess of $20 million up to $30 million, and 3 percent for any portion of the deal value in excess of $30 million. The success fee is typically subject to a minimum fee that the investment banker must be paid at the closing. In our experience, the minimum success fee usually required by experienced, middle market investment bankers is $500,000-700,000.
Investment bankers try to lock in the success fee and protect themselves against your terminating their engagement before the closing occurs. The engagement letter will likely include a “fee tail” period that remains in effect for nine to 12 months after the engagement is terminated. If you terminate the engagement before closing and then later complete a transaction on your own (or with another investment banker) during the fee tail period, you will still owe the success fee to the first investment banker. You may be able to negotiate certain exceptions to the fee tail. For example, the investment banker may agree that the fee tail applies only to buyers that the investment banker contacted about the deal during the engagement.
Investment bankers customarily require payment of an up-front retainer fee when the engagement begins. The retainer fee is generally non-refundable, but should be credited against the success fee due at closing. In our experience, the typical retainer fee ranges from $50,000-100,000 in middle-market transactions. You will also be required to reimburse the investment banker for out-of-pocket expenses.
While the success fee, the retainer fee, the fee tail period, and the expense reimbursem*nt are common elements in almost every engagement letter, you should remember that the dollar amounts, percentage amounts, break points and many other terms in the engagement letter can and should be negotiated. If properly structured, the engagement letter terms will motivate the investment banker to help you achieve your goals in the sale of your family-owned business.
FAQs
Investment bankers customarily require payment of an up-front retainer fee when the engagement begins. The retainer fee is generally non-refundable, but should be credited against the success fee due at closing. In our experience, the typical retainer fee ranges from $50,000-100,000 in middle-market transactions.
Do I need an investment banker to sell my business? ›
While it is certainly possible to sell your company entirely on your own, it's very likely that an investment banker on your side will result in better deal terms, a higher sale price or both. Indeed, those are the main reasons so many business owners seek out I-bankers.
How much do investment bankers charge for acquisition fees? ›
Investment banker fees for large business transactions typically range from 1% to 2% of the total transaction value. Investment bankers play a critical role in the M&A process by helping businesses find potential buyers or investors and negotiate the terms of the deal.
What is a success fee for an investment banker? ›
In finance, a success fee is a commission paid to an advisor (typically an investment bank) for successfully completing a transaction.
What is the average commission for an investment banker? ›
Investment Banker Fees
On average, the commission for a business with a $5 million to $10 million value will be approximately five percent of the transaction value. For businesses with values greater than $10 million, the commission will generally decline from five percent as the transaction value increases.
How do I sell my business to an investor? ›
How to Sell Your Business Idea to Investors
- Start With a Solid Business Plan. ...
- Know Your Audience. ...
- Craft a Compelling Pitch. ...
- Showcase Your Passion and Vision. ...
- Be Transparent. ...
- Anticipate Questions and Objections. ...
- Present a Clear Plan for the Funds. ...
- Build a Relationship.
The role of the sell-side M&A banker is to look for the purchase price, with a special focus on working capital requirements. As far as legal clauses are considered, the bank may form a legal team to advise the sellers, or the sellers may hire a law firm from outside to assist with the agreement.
What is a reasonable acquisition fee? ›
What is a Reasonable Acquisition Fee? A reasonable acquisition fee in real estate varies depending on the type of investment and the complexity of the transaction, but they generally range from 1% to 3% of the purchase price of the property.
What is a standard acquisition fee? ›
The acquisition fee can be charged on the total size/total cost of the deal. Or, they can be charged on the amount of equity raised from investors. A normal acquisition fee range is 1% – 2%. But, it should not be a profit center for the real estate firm.
How much should an acquisition fee be? ›
Acquisition fees can have a significant impact on individual real estate investors. These fees are typically charged as a percentage of the total cost of the investment property and can range from 1% to 5%.
It mostly varies from deal to deal basis. A typical structure could be: Deal Ranging from $5M to $15M can have a fee of 5% to 7% with a fixed fee of $250,000. Deals Ranging from $15M to $50M can have a fee of 3% to 5%.
What is a fair investment management fee? ›
The industry typically refers to this as an investment management fee and averages between 1-2% of assets (i.e. A $100,000 investment could cost you between $1,000 - $2,000 annually). In recent years, thanks to technology and higher overall awareness, these fees have fallen closer to an average of 1%.
How high is too high for investment fees? ›
Generally speaking, an investment ratio above 1% is considered too high and should be avoided by most investors, since it far exceeds industry averages. But there may be instances when it makes sense to pay a higher expense ratio, depending on the type of fund you own and your objectives.
Do investment bankers make 500K a year? ›
Ways to make a lot of money in this world
Sure, anybody can make a good living being a doctor or a lawyer or an investment banker where you can make ~$200-500K per year a few years after you finish with your studies, but you hit a ceiling very quickly unless you start your own practice (aka start your own business).
Who pays investment bankers the most? ›
1. Goldman Sachs is the highest paying bank overall - $398k in combined salaries and bonuses, on average. Goldman Sachs, which paid average salaries of $200k and average bonuses of $199k for 2023, was the highest paying bank we polled.
Are investment banking salaries negotiable? ›
The first step to negotiate a higher salary and bonus in IB is to know your worth in the market. This means doing your research on the average compensation for your role, level, and location, as well as the performance and culture of the firm you're targeting.
Are investment bankers still needed? ›
The U.S. Bureau of Labor Statistics (BLS) projects that securities, commodities and financial services sales careers—which include investment bankers—will grow by 7% from 2022 to 2032. This projected growth is faster than the 3% growth projected for all occupations nationwide.
When you sell a business who gets the money in the bank? ›
What Happens to Cash in the Bank When You Sell a Business? The money is not a company's assets in most cases, and the seller is allowed to keep the money in the bank. The only time the money would be considered an asset is if the owner put money in a particular bank account to sell the business.
Can you sell a business without financials? ›
Even if potential buyers are attracted to your business for other unique and personal reasons, a sale won't stick without promise of a strong bottom line. You need to provide all sellers with comprehensive and organized financial documentation.
Are investment banks necessary? ›
In contemporary mixed economies, governments and large companies rely on investment banks to raise funds. Investment banks match those selling securities with investors. This is known as "adding liquidity" to a market. Investment banks work with commercial banks to help determine prevailing market interest rates.
