The Economics of a Shit Boutique
I read a post from a year or so ago on here that was essentially ripping on the economics of running a LMM Boutique M&A shop and as someone currently interning at one, I can’t say I agree at all when I break it down.
Again, I’ve only done 2 IB internships at smaller shops so my purview is very limited as to how accurate these figures are but let’s take some ballpark estimates for a 4-man team doing deals in the $25M range and using the Modern Lehman formula (comes out to a 4% or $1M fee). Expenses wise, let’s say $100k for a small Office, another $100k for Technology/Legal/Accounting, let’s say $50k for relevant annual licensing fees, $50k for Marketing and another $150k in other relevant operational fees (Travel, IT Support etc). That leaves you with $450k in relevant annual operational costs to keep the lights on. Then on to base salaries, ik some people mention that senior guys who are on the way out often structure comp as 100% commission but for sake of argument here let’s assume they have a base (albeit v/low). Of this 4-man team, let’s assume 2 Partners/MD, 1 VP and 1 Associate/Analyst, and the MDs take a base of say, 150k, VP 125k and Associate 100k. Admin assistant at 70k and maybe a Biz Dev/Sourcing/Deal Origination guy at 70k as well (will discuss bonuses shortly). That’s 665k in base salaries and so you’re at 1.15m so far, we’ll call it 1.2m.
Let’s assume they’re able to do 4 deals that year = $4m in fees. Corporate taxes in a place like California look like around 800k after deductions and so you’re left with $2m over in your bonus pool. MDs take 33% each (666k), VP 17.5% (350k) and Associate 14% (280k), leaving 2% to your BD guy (40k). Total comp looks like $816k for the MDs, $475k at the VP level, $380k for the Associate and $110k for your BD guy.
Obviously doesn’t sound like an overly lucrative venture when compared to an MD/VP scale at EBs or MMs and even vs. BBs, but after seeing this work firsthand, closing 4 deals a year in this space is 100x easier than the stuff you chase at a BB. There’s an MD on my team who came from a completely different industry and frankly knows jack shit but manages to close 3-4 deals every year by himself in the sub $50M space, and I can’t help but imagine that the lifestyle for a gig like this would be pretty sweet.
I also know a guy who graduated college in like 2020 and worked at one of these boutiques for a year out of college as an Analyst. He ended up leaving after a year or two and set up shop with one of his friends who was at the junior VP level at a peer LMM bank, and in their first two years they’ve done like 8 deals all in the sub $40M space and seem to be killing it. Dude is a partner at his own shop at like 26 raking in 500k+ easy with a great wlb
What’s stopping someone from doing this after getting 1-2 years of deal reps as an analyst/associate? I know people will say ‘oh well it only works for former rainmakers/MDs who have relationships’ well the firm I’m at again has guys from different industries and they literally just hire 2-3 Biz Dev guys to find leads and have 2 FT juniors to model everything out, pitch and boom.
Can anyone give me insight if I’m missing something/completely off or is starting your own gig in the LMM space a lot less bleak than I’ve been told?
Based on the most helpful WSO content, your breakdown of the economics of running a Lower Middle Market (LMM) boutique M&A shop is fairly reasonable, but there are a few nuances and risks that might not be fully captured in your analysis:
Deal Flow Consistency: While you mention that closing 3-4 deals a year in the sub-$50M space is easier than at a BB, the reality is that deal flow in the LMM space can be highly inconsistent. Many boutique shops struggle to maintain a steady pipeline of deals, and a bad year (or two) can severely impact the firm's financial health. This is especially true if the firm is reliant on a small number of rainmakers or business development professionals.
Client Quality and Fees: The Modern Lehman formula you referenced (4% on $25M deals) is a good benchmark, but not all deals will yield such fees. Smaller clients often negotiate aggressively on fees, and some deals may fall through after significant time and resources have been invested. Additionally, clients in the LMM space may have less sophisticated financials, requiring more effort to get deals across the finish line.
Competition: The LMM space is crowded with boutiques, regional players, and even solo practitioners. Differentiating your firm and winning mandates can be challenging, especially for newer entrants without established relationships or a strong track record.
Operational Risks: While your cost estimates are reasonable, unexpected expenses (e.g., legal disputes, compliance issues, or failed marketing campaigns) can quickly add up. Additionally, hiring and retaining quality talent (e.g., junior analysts, business development professionals) can be difficult, especially if larger firms are offering more competitive compensation packages.
Scalability: The model you described works well for a small team, but scaling the business to handle more deals or larger transactions can be difficult. This often requires significant investment in talent, technology, and infrastructure, which can erode margins.
Exit Opportunities: While starting your own boutique can be lucrative, it may limit your exit opportunities compared to working at a BB, EB, or MM firm. Larger firms often value the brand and deal experience associated with these platforms, which can make it harder to transition back into a traditional IB role if your boutique venture doesn't pan out.
Regulatory and Compliance Burden: Running your own shop comes with significant regulatory and compliance responsibilities, which can be time-consuming and costly. This is especially true in highly regulated markets like the U.S.
Rainmaking vs. Execution: While you noted that some boutiques hire business development professionals to source leads, the ability to close deals often depends on the senior team's ability to build trust and relationships with clients. This is a skill that typically takes years to develop and may not come naturally to everyone.
In summary, while starting your own boutique in the LMM space can be a viable path, it comes with significant risks and challenges. Success often depends on a combination of factors, including deal flow consistency, client relationships, operational efficiency, and the ability to differentiate your firm in a competitive market. For those with the right skill set and risk tolerance, it can be a rewarding career path, but it's not as straightforward as it might seem on the surface.
Sources: Q&A: Disadvantaged Background to A2A Promote at Elite Boutique, How is it to work at a small M&A advisory firm?, Regional Boutiques are vastly overlooked in IB, Started in M&A this month; 30 Years old. No prior experience. Non-target school., LMM PE Associate Experience - What is it REALLY like?
Most people aren’t entrepreneurial enough to go out and do this. But it also requires a year of the burn rate you described (probably less for Y1, but still) and it takes a lot of balls to spend all your money on a new venture like that. Then if you get into the idea of capital raising for a commodified venture, you’re adding time and complexity.
It is more of a game for more senior people, and by that time you have liabilities like kids and a mortgage eso your golden handcuffs from your corporate role stop you from taking the plunge.
I agree with you though. The economics are sweet.
Thanks for this insight, makes sense.
Curious to hear your thoughts on what would be a barrier to entry for a Senior Associate/Junior VP starting a venture like this? I mean, if they’ve had 5-6 years+ of deal reps in the same space, what issues would they have running the show with 2-3 guys at the same seniority? Like you mentioned, the burn rate for the first 6-12 months is significant but if you can shave off costs (ie. Remote/No Office, 80k base vs. 150k, Shave 100k off of Travel/Utilties/Etc) you could probably get this thing up and running for a few hundred K and the upside is huge. Or is it more so that the skills at the D/MD level are more important that an Associate/fresh VP may lack? Reason I say this is as an intern at a place like this rn, the deal size is so small and so unsophisticated compared to even the middle market that I just can’t imagine it necessitates the skillset you’d have as a MD vs young VP/Senior Associate.
Would love to hear your thoughts on that
"Or is it more so that the skills at the D/MD level are more important that an Associate/fresh VP may lack?"
I think you are on the right track there. Specifically, D/MD folks will have not just seen enough deals to know the process (like a Sr. Assoc. might), but will also have seen another chunk of deals at the more senior level where they have developed the soft skills . . judgment, decision making, communication, how to resolve crises and so forth.
Put yourself in the shoes of the client, you're being pitched by a 30 y/o upstart with who knows the process well but you also know a 40+ year old MD somewhere who has 2x the experience and 10x the senior experience.
So that's why it can be hard. But is it a bad idea? No, definitely not. Your original post is basically spot on, and the only real separator is whether you have the intestinal fortitude to walk away from well-paying career with relatively low risk, to start something that could fail or at best, make you tread water for a while before you get paid. And your upside will be a lot more money, but does that additional money help you level up? For many people, once you've got big stuff taken care of, additional money doesn't do much until you've got a jet. So for those people, there's actually limited upside because the additional money doesn't really make them happier.
But if that money is satisfying certain goals, or if the independence and competitive aspects of having your own operation are satisfying a need, then I think it makes a lot of sense actually.
All the same issues persist in my mind. It’s hard to walk away from a guaranteed shit ton of money that keeps increasing.
I would also say if you are talking about a typical BB banker, they also don’t have the skillset.
Working on sub 50M deals is very different than a billion dollar transaction. Counterparties are different, level of organization is different, junk financials everywhere, and a lot of family businesses where the Patriarch could randomly decide after 4 months to bail on a sale and unless you have a work fee you’re out on opportunity cost.
Currently work in one of these.
Under the same scenario of revenue:
Analyst - 150K TC
VP - 400 TC
MDs - Rest
I don't it's worth it tbh. Sure, your hours aren't bad and you work in banking, but you're working a shit bank with no name. If you really value having a life, go for it. But, I think analyst years are important for development and setting you up... no head hunters are going to reach out... you're not going to lateral... you're kinda fucked. I bet kids at EBs would take it in a second after a shit week... grass is always greener on the other side. The rainmaker holds all the connections... he's not going to bring in another due to guarantees and all the connections lie with him. No light at the end of the tunnel.
This post completely ignores the very high tail risk of closing nothing and paying yourself nothing. I worked at one of these for a couple of years before transitioning to PE (although the firm I worked at was IMO a tad more reputable than the majority of these generic boutiques - we were routinely competing against Blair, RJ, Piper, etc. for mandates and most of our deals were between $50-$150M EV).
(1) closing $4M in deal fees in a year is really fucking hard. A $25M sellside is no joke and execution may be less complex than a $1B deal, but the time it takes to set up materials (CIM, teaser, model) is still very high and more importantly, odds of closing are much lower due to a combination of irrational/non-sophisticated seller dynamics, high likelihood your client is a ShitCo, etc.). The firm I worked at had very high quality sellside mandates for good companies when I joined with c. $10M in total deal fees if we closed, and we ended up closing 1 tiny buyside for like $500K in the 18 months I was there before I transitioned to PE.
(2) as noted above, closing a $25M deal is no joke and probably takes ~75% of the same time commitment as closing a $250M deal. The business may be less complex but you still need to create a 30-50 pages CIM, a full financial model (working with a dogshit fractional CFO who doesn't know how to balance a balance sheet), nonexistent KPIs, cash basis accounting. Total nightmare and huge time suck.
(3) sellers in the LMM are totally insane people with zero rational behavior or thought. They will pull out of a deal the night before signing because it was revealed to them in a dream. No, I've literally seen this - PE firm already had funds wired from lenders and were 1 day from wrapping it up and the seller backed out. Nothing is rational and everything is emotional. Tons of delusional founders who think their $3M EBITDA ShitCo is worth 15x because they saw a comp set of companies 10x bigger than them.
Working at one of these as a junior is a complete scam. You will get inferior training, inferior dealflow, and probably closer fewer deals. You won't get exposure to any esoteric deal structures/transaction types and in all likelihood, get paid a fraction of your peers at BB/EB/MM. I took the risk because I started at a larger bank and had good economics going into this gig (5% of deal fees) but I would have gotten crushed straight out of college.
This right here ^^.
I’m currently living it.
We’ve had a seller back out the night before signing because his son decided that he actually wanted the business.
We’ve had companies lose their #1 customer right before LOI’s are due.
CFO’s who are really just the CEO’s wife after watching a Quickbooks tutorial online.
The odds of successfully closing deals in this valuation range are much lower, and the fixed cost base is high.
Closing 4, $25M deals with a 4 man team is an exceptional year, not the norm. You can sign these clients, but getting them all across the line is a feat. Deals drag, they fall through, and then you’re left with a donut after 4 months of work.
In my opinion:
The barriers to entry are indeed low, but this works both for and against you. The significant competition means you are building a business that requires significant grinding.
It’s achievable, but you need to play the long game. The ramp-up period will likely be longer than you expect, but after 10+ years, the potential to achieve meaningful success is greater than it might initially appear.
Specialization is beneficial, whether it’s sector-focused (e.g., tech or healthcare) and/or a regional expertise in an underserved market.
If you're starting out without established seniority or relationships, one approach could be focusing on buyside engagements in LMM build-ups. In this model, you position yourself as an efficient, fractional M&A team, with the majority of your fees tied to success. If financial pressures like mortgages are a factor, there’s room to secure modest retainers, though this may involve sacrificing some upside. You can handle multiple assignments simultaneously, increasing the likelihood of closing deals over time.
Overall, I believe you may be overestimating both the short-term revenue potential but also the required fixed and variable costs.
If you’re working on engagements you enjoy with people you like and making a good amount of money, I wouldn’t call it a “shit boutique” at all :)
This is not the case of a ‘shit’ boutique but more of a solid lmm business brokerage. The real shitty ones never close a deal for years, which the average deal size is 5M - 15M.
I can speak to all of this first hand and am in the process of launching a LMM boutque now. I worked at a generalist boutique for several years focused on companies at the bottom of the LMM. When you're a generalist getting good sell-side mandates is tough. I specialized on a sector and have an operator background in my sector which helped me. This model is achievable IF you have the right strategy and IF you are really good at what you do. (great @ origination, amazing pitches, etc...). And yes the work-life balance is way better. No corporate BS, more autonomy, etc....
DM me if you are interested in discussing
OP here - messaged!
People have mostly hit the critical points. Closing four $1mm fees in a year with that size staff is very difficult and takes a lot of luck (meaning you won't have that result every year). Fee size for $25M is probably closer to like $500K too (~2% of TEV) so half that total, meaning you need to do even more.
What's interesting though is that this was done quite successfully many years ago. Harris Williams was founded by two IB VPs who were only like ~4 years post MBA. I think the market has probably evolved too much and gotten too sophisticated for it to be successful now (at least at the MM level) but someone had the enterprising thought previously and acted on it.
Interesting, didn't know that's how Harris Williams was formed. I'm surprised that deal fees would be that low, as I was under the impression it was closer to 3-4%
I read the other responses. The other piece that’s missing is that people pay for the gray. If you’re too young, people will discriminate against you and not trust you to run the sale of their business.
My boss and I went to a client’s office one time with just me, and when we came back, he said “you had the idea for the meeting and the ideas for the deck, but the people always pay for the gray” and grabbed his scalp. He’s right.
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