APPROACH

Preparing for Investment
Making the Market
Deal Progression & Diligence Support

EXPERIENCE

Closed Transactions By Type
Most Relevant Situations
Reasons for Last 3 Failed Deals

FEE STRUCTURE

Fee Model
Commitment Term
Estimated Fee/Minimum Fee
What is paid if there is no transaction?

ANGLE

Approach to Our Situation
Value Guidance
Definition of Success

PERSONALITY CHECK

Ethics
Shared View on Success

Understanding the Financial Commitment

To work on your behalf (known as a “sell-side engagement”), an intermediary can be engaged under a retainer fee, a success fee, or a combination of the two methods. 

Retainer fees, also known as work fees, typically start at $50,000 and go up depending on the size of the potential transaction. Some retainer models involve a monthly installment, while others are arranged for a term at a flat fee. 

Success fees usually represent a percentage of completed transactions. The details matter in success fee arrangements, as some will require you to pay the full value of all consideration in the transaction to them at close (including cash, debt, equity rolled over, seller note, earnout). Make sure you understand what proceeds are included and when payment is due. 

The success fee percentages can be structured in several ways. On smaller deals, the success fee may be a flat percentage – usually 6% to 12% – of the transaction. On large deals, that flat percentage can drop as low as 1.5%. The workload required by an intermediary to close a deal does not differ tremendously based on the size of the transaction, and actually can be less work for larger companies considering the increased access to resources. 

The most common success fees structure we see used in both sell-side and buy-side engagements is the Lehman structure. Under Lehman, you would pay: 

5% of the first $1 million

4% of the next $1 million

3% of the next $1 million

2% of the next $1 million

1% of the remaining total

“Modified Lehman” terms involve altering the percentages (i.e. 6%/5%/4%/3%/2%, or 1.5% on the remaining total). Although we rarely see it, “Double Lehman” doubles the percentages (10%/8%/6%/4%/2%). 

Some intermediaries employ the opposite of Lehman, called a reverse scaled success fee, in which the percentage rises based on the total amount. This obviously incentivizes the intermediary to seek out the highest possible price above all else. As with lawyers, working with an independent intermediary usually means lower costs than working with a firm. But buyer beware. An upfront “discount” may not pay off in the end. 

If you engage an intermediary, you will be expected to pay at least a portion of their fee at closing. If an intermediary engages you under the guise that the buyer will ultimately cover your fee, we recommend choosing another intermediary. At best, you will frustrate the buyer and cause trust issues. At worst, the investor will walk when the “game” becomes apparent. 

Most hiring agreements require you to make a 24- to 36-month commitment to have that firm represent you in the market. Most require exclusivity in this representation, which is another reason to choose wisely. In practice, that means that if you complete any transaction during that period, you may owe them a fee. The nuance is around whether the intermediary originated the introduction and their level of involvement. 

Investors also sometimes engage intermediaries (known as “buy-side engagement”). The fee structures are similar and their marching orders are to go find potential sellers that are not actively trying to sell their business. There’s a good chance you’ve been contacted by one before. Buy-side intermediaries should not be charging you anything to introduce the potential buyer, as their fees are already covered. To do so is playing both sides, and is unethical.

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