How Much Do M&A Advisors Charge?

If you’ve been researching how to sell your business, then you probably know you’ll need some help from a business broker or mergers and acquisitions (M&A) advisor. Not sure which of those is best for you? Check out our blog on the difference between business brokers and M&A advisors.  

If you’ve determined an M&A Advisor is the right intermediary to help sell your business, the first question you’ll probably ask is “What do M&A advisors charge?”  

At MidStreet Mergers and Acquisitions, we’ve stayed on top of the trends when it comes to M&A advisor fees and fee structures. 

According to a survey of M&A advisors conducted by Firmex, most advisors charge a $15k+ work fee (or retainer) up front, and then deduct the retainer from their success fee upon closing.  

For deals valued at $5-10 million, success fees tend to be between 4% and 6%.  

Three-quarters of advisors also bill clients for certain expenses. 

In this blog, we’ll take a deeper dive into work fees and success fees, what expenses M&A advisors bill their clients for, and the value advisors bring to the table.

Let’s dive in! 

Work Fees 

Work fees (or retainers) are charged by M&A advisors for their efforts to sell your business, whether the business actually sells or not. 

Without a retainer in place, the advisor could potentially spend thousands of dollars and months’ worth of effort to sell your business, only to receive no payment should either party decide to back out. 

This may sound alarming at first. After all, you probably don’t want to pay an advisor $15k or more in addition to a success fee once the deal is complete.

But don’t worry too much. You’ll be happy to hear that of all the advisors surveyed who charge a retainer, 72% deduct it from their success fee once the deal is completed.   

The most common work fee structure for M&A advisors is a fixed work fee, which is a one-time, up-front charge. Remember, for 72% of M&A advisors, this amount will be deducted from their success fee when the business sells. 

For fixed work fees (which make up 42% of work fee structures): 

• 55% of advisors charge work fees greater than $15k 
• 36% of advisors charge between $5-10k  
• Only 9% charge less than $5k 

The second most common work fee structure is a monthly work fee, charged throughout the duration of the deal. 

For monthly work fees (which make up 35% of work fee structures): 

• 40% of advisors charge monthly fees between $5-10k 
• 23% of advisors charge monthly fees between $10-15k 
• 20% of advisors charge monthly fees greater than $15k 
• 17% of advisors charge monthly fees less than $5k 

Success Fees 

Success fees are paid to M&A advisors once a deal has been completed, and act as an incentive for them to find you the best buyer and highest purchase price possible.

M&A advisors differ in the way they structure their success fees, which you'll have to review (and in some cases negotiate) before signing a listing agreement. 

There are several things that determine an advisor’s success fee, but there are some factors that have a greater impact than others. Three of the most impactful factors affecting success fee percentages are: 

• Deal size – Generally speaking, as deal sizes increase, success fees decrease. Larger deals allow advisors to collect a paycheck worthy of their time even when they charge a lower percentage for their success fee.

• Transaction complexity – When you pay a success fee, what you’re really paying for is all the time the advisor spent finding the right buyer, creating marketing materials, helping with negotiations, etc. That being said, the more complex a deal is, the more time it takes to get the deal done, and the more money an M&A advisor will feel they deserve.  
• Advisor involvement – The more involved an advisor is in a deal, the more resources they will use, and the higher the success fee they will charge.

Among the surveyed M&A advisors:

• 39% of advisors charge a scaled percentage that increases over a certain purchase price threshold. For example, a $10 million target valuation could earn a 5% fee, with any amount exceeding $5 million earning 8%.  
• 38% of advisors charge a simple percentage. This means a flat success fee percentage will be determined at the start of the deal and will not change based on the transaction value upon closing.  
• 21% of advisors charge based on a Lehman formula or a close variant. A Double-Lehman scale, for example, charges 10% on the first million, 8% on the second, 6% on the third, and so on until the fifth million, at which point the fee is 2% for any amount exceeding $5 million.  

Only 2% of advisors use other success fee structures according to FirmEx’s survey.  

In smaller transactions, it's common for M&A advisors to establish a minimum success fee. This means if one of the success fee structures outlined above doesn’t meet a minimum value set forth by the advisor, they will require the seller to make up the difference.   

Expense Reimbursement 

When an advisor is working to complete a deal, there are several expenses involved. These expenses include travel and accommodation, virtual data rooms, and printing or materials costs. Three-quarters of advisors bill their clients for at least some of these expenses.  

Out of the three-quarters of advisors who bill clients for expenses, all of them bill their clients for travel and accommodation. This is usually the heftiest expense because advisors often have to travel for an initial meeting with the seller, tour their facilities, and eventually introduce the buyer and seller in person. 

Since it’s common for businesses to be sold across state lines, air travel and hotel expenses can start to add up, especially for an advising firm involved in several deals. 

Where M&A Advisors Add the Most Value 

At this point, you may be getting overwhelmed with all the different costs associated with selling a business, and no one can blame you. You’re selling your biggest asset, so you don’t want to spend too much of its value just to get it sold.

This is a totally understandable and completely legitimate concern.

A good advisor, however, is worth every penny. According FirmEx's survey, these are the top five areas where advisors add the most value to your transaction.

Managing the Sale Process 

Even with completely clean books, capable and eager buyers, and a business in a desirable industry, managing a sale can take several months.

From the initial valuation performed by your advisor, all the way to the negotiation of representations and warranties, your advisor is managing every aspect of the sale.

This includes speaking with the professionals on your side of the transaction, as well as those on the buyer side, both of which come with a CPA, attorney, and other team members the advisor will need to communicate with throughout the deal.  

Negotiating the Deal

A good advisor is both realistic and ambitious about getting you the highest possible purchase price for your business. Once negotiations begin, there are several items that will impact how much you actually walk away with after closing.

Your advisor’s knowledge on what items can be negotiated to maximize your seller net is something worth paying for.    

Sourcing Buyers

Advisors with experience have usually built a network of interested buyers in several different industries. When it comes time to list your business, they may already have a few potential buyers in mind with whom they’ve established trust

Good advisors will also create quality marketing materials to help source buyers for your business via listing services like BizBuySell and BizQuest. 

Limiting Distractions

As a business owner, the last thing you need is a wave of distractions that get in the way of running your business. Keeping your operations running smoothly throughout a deal is essential in keeping a buyer on the hook and maximizing your business’s value.

To assist with this, advisors act as a buffer that absorbs most of the requests and distractions coming your way. They act as a filter and only forward the most necessary requests which allows you to run your business as normally as possible.

Establishing Your Credibility

Buyers know there is a certain amount of risk associated with any business acquisition, but the less risky an acquisition appears, the more a buyer is willing to offer.

A good advisor can help to establish your credibility with potential buyers, which will draw more buyers in, keep them on the hook, and maximize your purchase price.  

How Are Fees Changing?

According to the data presented by FirmEx, four out of five advisors say they haven’t seen any more pressure to increase fees in the most recent year than they did in years past, which is good news for sellers.

Many were concerned that the impact of COVID-19 would increase advisor fees, but only 8% of advisors upped their fees in response to the pandemic.

One trend worth mentioning, though, is the changing landscape of work fee structures. Although a flat work fee is still the most common, advisors who charge monthly work fees grew from 25% in the 2019-2020 cycle to 35% in the 2021-2022 cycle.

Another significant change is the number of advisors who deduct retainers from their success fees. 63% of advisors deducted retainers in previous years, whereas 72% reported deducting them this year.

Lastly, there has been a 5% increase in the number of advisors who request to be reimbursed for data room costs in the 2021-2022 cycle.

Understanding M&A Advisor Fees 

While the numbers above represent the most common M&A fees and structures, it’s important to remember that every firm is different, and it’s likely that you’ll hear different stories from each one you contact. 

Our advice is to interview several advisory firms to find the best one for your business transaction.

Only 17% of M&A advisors report that multiple advisors proposing on an engagement (i.e. an M&A advisor bake-off) affects their success fee percentages.

This suggests that the majority of business owners aren’t interviewing multiple advisors before signing a listing agreement, which can be a huge mistake. 

If you’re in the process of interviewing advisors and would like to learn more about the fees we charge at MidStreet, don’t hesitate to contact us. We’d be glad to share our rates and learn more about you and your business.