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M&A Fees To Sell Your Business

Some fifteen years ago I hired an M&A broker to help sell a company I was involved with. After receiving the quote, I started to look around for comparable costs to see if the price offered was competitive.

I soon came to realise that very few investment bankers, business brokers or M&A firms actively publish their fees. Needless to say, it became quite difficult to nail down a competitive benchmark!

So when I moved professionally into the world of selling companies, I needed to get a better grasp of the fees charged in the real world.

Here’s what I’ve learnt in the past ten years or so. It’s not perfect – fees of course change depending on many factors – some of it economy-driven, some of it by nature of competition, and some of it is just darned difficult to obtain.

So this continues to be a work-in-progress. But used in my daily work, it seems to be passing the test of time.

Comments welcome!

But first, let’s talk terminology

If you are thinking of selling your business, you will undoubtedly look for ‘someone’ or ‘some firm’ to sell it for you – straightforward enough. But alas, there is little consensus on the type of firm or individual you may want to use.

Are you looking for a business broker? A business transfer agent? An investment banker? An M&A firm? A corporate finance firm? An accountant?

Complicated isn’t it?

The reality is that all of the above can and do operate in the world of ‘selling companies’. To get a sense of which terms apply and to whom, here is how I define company size in respect to their annual revenues:

Sole trader                              < £1M

Small business                       £1M – £10M

Lower mid-market                 £10M – £250M

Mid-market                             £250M – £500M

Large company                      £500M +

Business brokers, business transfer agents and occasionally, corporate finance firms typically serve sole traders and small businesses. Smaller accounting firms also target this space – if they offer corporate finance services.

Once company revenue tips north of £10M, one tends to see M&A firms, corporate finance firms and investment bankers as the typical firm supporting a company sale. Once revenue hits £50M plus, my experience is that only M&A firms and investment bankers are present…

But just my experience.

Oh, and let’s not forget the larger accounting firms. They also are highly active in the lower-mid and mid-market space and competing with the M&A firms and investment bankers…

As you can see, there is no ‘one-size fits all’ definition.

What “M&A” service do you require?

One of the reasons obtaining comparative fees is that the services offered by the various firms can differ substantially.

Are you looking for strategic guidance on how to prepare / groom your business? Will you or your management team require coaching or mentoring in the period leading up to the sale?

To get a sense of this, strategic guidance may take 2 – 3 years of effort even before the company hits the market – a huge difference in workload compared to a simple ‘exit-only’ transaction.

My experience is that fees for any upfront work, be it strategic guidance, coaching or mentoring, are charged either as a retained monthly fee or fall due as the work is completed.

I have seen fee rates equivalent to anywhere from £100 per hour to as much as £450 per hour, depending on (a) the size of the firm providing the services and (b) the experience / seniority of the individual.

M&A fees

OK, so you now wish to sell your Company, how much will it cost?

There is an old adage: it takes the same effort to sell a large company as it does a small one. This is largely true. So whilst fee rates tend to increase in respect to the size of the deal, there is a cut-off point at the lower end where fee rate is capped at a minimum.

So if you are looking to sell your £0.5M revenue business, alas, the fees will not be much different to a business with revenues of £5M. To do the job professionally means a lot of work regardless of revenue.

A side note: There are web-based business brokers who simply advertise a business for sale and usually charge a small flat fee. Perhaps these types of web portals are useful for sole trader / commoditised business – e.g. restaurant, B&B, but for larger businesses? I’m not so sure. So I don’t discuss this type of ‘agent’ here, sorry.

If you engage an advisor to sell your business, fees tend to fall into two camps – an initial work-fee and a success fee.

Work-fees

The work-fee reflects the initial work that an advisor has to undertake. For example, if you are looking to sell to a ‘strategic buyer’, an advisor will need to undertake some pretty heavy research to identify key individuals / actor and to speak with each individually.  The deal-book (Offer Memorandum) needs creating and probably lots of data crunching with the finance team to get financial projections ready.

The bigger the business, usually, the bigger the prep work. So expect work-fees to reflect this. For sole traders and small business, I see work-fees ranging from £0 to £50,000. One of the most popular UK business broker’s charges ~ £49K for upfront work, albeit amortised across several months.

Most work-fees are due at the outset of the project – either payable in full or amortised over a short period.

Just my personal view, any serious broker charging zero work-fee is either (a) not very good or (b) knows the value of a business is extremely strong (e.g. a very profitable company in a growth sector) and is prepared to offset risk with a ‘relatively certain’ success fee.

Or another way of putting this is, it can take 2 – 3 months full-time effort to get the preparatory work complete. Why would an advisor worth his / her salt undertake this for nothing? What is the client decided not proceed through no fault of the advisor? The advisor carries the risk of the project which includes many factors outside of his / her control.

Beware! There are brokers who advertise ‘no sale no fee’. My experience is that such firms put little upfront work into the project and simply punt a company teaser round the web. It’s similar to recruitment firms who randomly blast CV’s at employers. If that will work for you then fine, otherwise, consider carefully!

For lower mid-cap & mid-cap business, work-fees can range from £50K – £100K or more.

Success fee

Firms typically charge a success fee based on final transaction value. Each firm will have some small print on what defines ‘transaction value’ – read carefully!

Once upon a time, the infamous Lehman Brothers inspired the M&A industry to use the ‘Lehman formula’. This is simple formula that calculates the success fee based on 5% of the first million, 4% of the second million, 3% of the third million, 2% of the fourth million and 1% of the fifth million and above. It is still used by some today for calculating success fees.

For small transactions of less than £10M in deal size, I have seen success fees anywhere from 2% – 8% of transaction value. Small or independent business brokers can support lower success fees simply because they carry lower overhead. However, there is an inverse relationship with deal size – the smaller the deal size gets, the higher the success fee in my experience – simply because it takes the same effort to complete a £0.5M deal as it does a £5M deal.

In the sub-£5M deal size, I rarely see success fees drop below 3% – typical fees are 4% – 5%.

In the £10M – £50M range, I have seen success fees range from 1% and as high as 5%.

In the larger range of £100M + deals, my personal experience falls away. Leaning on my investment banking friends, I am informed that success fees typically range from 0.5% – 3%. But you may want to consult others here…

A caveat: Fees do vary – and can move outside of this range either up or down. Selling companies is like any industry – competitive! Some smaller M&A firms offer a standard ‘rack-rate’ for their services, some flex according to the risk-reward of the specific project.

The simple truth is that a good business broker can increase the price substantially. If an owner receives £10M for a business instead of, say, £6M. That’s a big gain that far outweighs the cost of a good broker.

Ultimately, when it comes to selling a business, like anything, you get what you pay for.

So my final comment is courtesy of John Ruskin:

“It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money – that’s all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot – it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better.”

I hope this sheds a little light on the secretive world of M&A!