How M&A advisers are paid: retainers and success fees

The two components of the fee

Sell-side engagements are usually paid in two parts. A monthly or fixed preparation fee typically covers the financial model, information memorandum, buyer list and management of the process. A success fee is payable if the deal closes, usually as a percentage of the transaction value.

Preparation fee

The preparation fee reflects both sides' commitment and covers work before buyers are contacted. Many advisers deduct it from the success fee, so it is included in the total if the deal closes.

The success fee

The success fee should give the adviser an incentive to improve the terms you get. It could be a single percentage of the deal value, a percentage that falls as deal value rises, or a higher rate above a target price to reward the adviser for exceeding your minimum.

Most agreements also set a minimum success fee, which reflects the work involved in completing any transaction, whatever its size.

What to check in an engagement letter

• How the transaction value is defined, and whether it includes debt repaid, deferred payments and earn-outs.
• How long a fee applies to buyers introduced during the process if a deal happens later.
• Which expenses are recharged, and whether they are capped.
• Whether the adviser takes a fee from the buyer. Look for an adviser who does not.

Why independence matters

An adviser paid only by you, with no lending, audit or tax relationship with you or the buyer, can focus on getting the best achievable deal for you. Check those relationships before signing.