Why dont bankers bill by the hour?
Wouldn't that solve the conflict of interest problem?
(ie the disconnect in client vs banker goals where bankers are just trying to get the deal done and collect the success fee, whereas clients want to make sure its a good deal to do)
If we billed by the hour, then wouldn't we be able to provide more fair advice, rather than advice steering towards getting a deal done and collecting fees?
Just dont understand why majority of fees are from closing the deal. Please shed some light!
Bump
One of the biggest advantages of hiring an investment bank is that you know they are going to get stuff done fast and still provide good value. You have to think of the trade off between hours and quality. Is it worth it to get work that is maybe 5% better if you get the work a couple days later? Keep in mind that you’re then potentially working slower on multiple things for multiple deals at once. Sometimes these deals have pieces that need to move much faster compared to others, and it’s especially complicated if more parties are involved. Additionally, it could incentivize banks to make the hours even worse than they already are because they can charge more.
Timesheets are fucking awful. You do not want to bill by the hour. To answer question though, it’s because banks are usually working to sell a company. You are in charge of marketing a company and running a competitive process. As such, it makes sense to have your comp/fees tied to % of EV so that you’re incentivized to create the best materials and ultimately trade the company for the highest price. However, in buyside mandate this completely breaks down. Agree that there is a huge conflict of interest in a buyside.
Because the current method lets banks extract more value out of entrepreneurs.
Rx bankers bill by the hour
Because clients pay to get deals done, not for investment banking work which very frankly, clients don't care whether it takes 100 hours or 1,000 hours, just that it gets done.
Some issues if a bank charges by hour:
- introduces variability into the fee (can pay from 1m to 10m), which makes it hard to budget for a corporate and certainly won't fly for a CFO to bring to his CEO/Board
- banks will then be incentivized to prolong processes which is not good for the client who prioritises outcomes
But isn't there always a BigLaw firm billing by the hour on every deal anyway? Their fee structure is brought to the board and approved, and they somehow manage to avoid the concern of prolonging the process
Why would there be a conflict of interest as far as the sell-side is concerned? The fee structure as % of EV is already there to avoid this.
Yes, but the lawyers don't drive the sale/purchasing process.
for Legal DD, usually the clients will require a gant chart and a specific timeline so the fees are quite straightforward on this.
for SPA drafting of course it's a to and fro between principals, but from my understanding, the partner and CFO (or whoever agreed to this) will have a cap on this in the letter in terms of both fees and time spent. The lawyer gets paid for their time throughout the discussion so it's a win win, and they have no incentive to prolong the timeline because they get paid anyhow (unless they have no other work to do), and the cap is a milestone to take stock and see whether their involvement is extended.
If anything, lawyers usually just max their time charge sheet and for the hours that exceed it that they work, they don't put it down. and they usually work more for a client and don't put down all the hours.
Happy for you to share your thoughts or if you are in law, your experience - this is based on my understanding and chats with some lawyer friends in the past.
Someone else made a similar post a while back and there was a comment that I found insightful.
Bankers are to realtors as lawyers are to consultants. Bankers and realtors are hired because of their ability to execute something at a high level and quickly. Lawyers are paid for their advice and time, which is why there's a billing structure in place for that industry.
Execution-based jobs --> no hourly billing
Was just looking for this old post lol. But second this ^
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