Fee Structuring & Winning the Mandate

Why Fee Structuring & Winning the Mandate?

In order to get paid, investment bankers have to land the engagement. Once the fee is agreed upon, the investment banker puts fee structure in something called an engagement letter. In the lower middle market to middle market, most investment bankers work on a success fee basis meaning that they only receive compensation on a deal when it actually goes through and closes.

Fee Structuring & Winning the Mandate Process

Type of Fee

Size of Fee

Sell Side & Buy Side Representation?

M&A Engagement Letter

M&A Fee Structure:

Regarding fees, here is a simplified understanding of fee structure for sell side engagements. The key to remember here is that you do not make your money when you quote your fee, you make your money when you close the deal. The point is that I would rather win an engagement and give up 1% to 2% of the fee than have the seller think that I am not being fair. The Lehman scale simplifies this a bit but often times the seller will want to know the exact % that they will be paying you.

● Large cap – Lehman scale

● Mid cap – Lehman scale

● Small cap – Lehman scale

● Middle market – Double Lehman structure

● Lower middle market – 3% to 10%

● SMB: 10% to 12%

Type of Fee

The category of the target and thus deal is going to drive the type of fee used by the investment banker. For SMB & lower middle market deals, you are usually going to see a success fee only. Middle market and above can be retainer plus a success fee.

Success Fee vs. Retainer + Success Fee

Size of Fee

In the lower middle market to middle market, fees usually are the following:

● 6% for <$5M TEV

● 5% for $5M-$7M TEV

● 4% for $7M - $10M TEV

● 3% for >$10M TEV

As you move higher than $2M in EBITDA, the Lehman Scale appears and this is the preferred method for pricing the fee.

M&A Success Fee

In the SMB & lower middle market, most investment bankers work on a success fee basis meaning that they only receive compensation on a deal when it actually goes through and closes.

Buy Side & Sell Side Representation?

In the SMB & lower middle market, it may be possible to represent both the sell side and the buy side. This is less/not likely on larger deals.

M&A Engagement Letter

In order to get paid, investment bankers have to land the engagement. Once the fee is agreed upon, the investment banker puts the fee in writing in something called an engagement letter.

M&A engagement letter structure

The typical M&A engagement letter structure outlines the following:

● Term

● Exclusivity

● Size

● Other services

● Valuation