How are advisory fees calculated?
Is it always as a % of EV? (w/ floor and cap) Does it also depend on the sector? As in some sectors deals are fundamentally larger than others (e.g. infra vs tech), are different rates used?
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Typically as a % of TEV. Very large corporate deals cap out at certain “market” rates (call it, 1.5% of TEV of max) because many bulge brackets will compete for the mandate and their economics are well known by all parties involved. The more esoteric the situation, the more likely that the senior banker has pricing power via differentiated skill set, which can lead to larger fees for certain situations. I’d say these are more common in specialized industries like utilities + others I can’t speak to.
In the UMM, fees are generally higher as a % of TEV, and can even reach 3-7% depending on asset size. Specialized situations where the banker knows the market extremely well warrant higher fees, but sponsors don’t always pay for that. It is a risk-reward calc for the seller.
In all cases, but particularly UMM, good banks will also negotiate an aggressive ratchet whereby they capture a significant incremental fees (+3%, or even as crazy as +10%) for incremental TEV above certain negotiated thresholds.
In LMM, you start getting into business brokers. Don’t really know what their fees are, but I don’t think they do much traditional sellside M&A work - positioning, CIP, dataroom management, process leadership vs. just connecting seller and buyer and taking a finders fee.
Yeah ratchets were the reasons we made so much money in 2021. All fees structures were signed when multiples were more normalised, then everything suddenly went nuts and banks were killing all multiples ratchets. But it wasn’t because the bank was particularly good, it was just the market
I work in LMM (95% sellside M&A with our deal EVs range from $25mm - $200mm), we typically structure our deals with a minimum fee and % of EV with kickers over a certain threshold (larger %). We do everything in a sell-side process any investment bank does (Buyers list, Teaser, CIM, Outreach, VDR management, Negotiating etc.)
Great adds, thank you. Definitely did not mean to imply all LMM is served by business brokerage, just that I don’t know how that space works. I suspect a business broker doing something in the $25-$100mm would charge a smaller % of TEV success fee but with none of the added bells and whistles from an investment bank that you mentioned.
Interesting.
So what are the typical deal fee % for transactions + kickers in the LMM to MM space from what you've experienced?
What is the most accurate fee structure for most M&A deals (e.g., the Lehman Scale or some modification thereof)?
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