Compensation Question - Middle Market
Hi guys, received an offer from a lower middle market boutique in NYC - VP level. Similar to other LMM boutiques they pay a below street base with a % of fee instead of a 'performance bonus'. Base is only $105k. They say average fee is $1.5mm to $2.0mm (guessing they are exaggerating a bit to sell me). % of fee offered right now is 8% if I execute the deal, 20% if I source AND execute. Keep in mind I've never sourced deals before so I'm sure will be difficult and firm doesn't have brand name to rely on. No idea if this is market or not, I know LMM deals tend to have much lower deal close certainty as well. They claim to close 2-3 deals a year, there's already one other VP. They are willing to make base $155k but $50k of that would be a draw, which obviously isn't ideal because I'm accumulating debt until a deal closes. No performance bonus to provide downside protection should none of my deals close. Thoughts on this offer? I know there's other firms that pay with this type of structure but no idea what market is so any feedback is appreciated.
Hey Lucky,
This sounds like a pretty risky bet. I was in a similar situation two years ago, where I was at a $1.5B+ PE fund and was offered a position with "partner track" opportunities at a small, niche sector focused merchant bank that was converting to a PE fund. They used the same strategy for me - selling on lower salary but huge potential upside through deal bonuses, as well as attractive carry in the fund and co-investing opportunities in deals.
I was not super happy at my shop given typical 3 years and out structure and no opportunity to be promoted without an MBA (industry standard) despite performance (was the top comped in my class). I'm a hungry and entrepreneurial guy, so I decided to roll dice and take the offer. Had a great experience, but none of the upside fell to the bottom line, for reasons out of my control at the firm. I've since left, and if I had clear visibility to how it was going to play out, I wouldn't have left the larger MM fund. I acquired some great experience and had significant responsibility, but it lacked the comp commiserate with my results in the end. If I were in your shoes, I would hold out for something better / with a better risk weighted outcome opportunity set.
Can you provide any insight as to what your current role is and the opportunity set at your current firm?
Thank you for those thoughts - currently at a MM bank with a more traditional pay structure. I think what frightens me most is I’ve heard LMM deals are much more imperiled by risk of not closing due to lower buyer quality, messy financials, volatility of emotional decision making by private company owner etc. Plus “2-3” deals per year doesn’t sound great if there’s two VPs. I could see it being worth the risk if the fee %s come up but trying to figure out what’s market to counter. I know there’s some other firms out there that employ this structure.
No problem. I'm currently at a MM bank as well (working toward VP promotion at end of year). I can attest to the lower market deals being more risky - had a similar experience closing a small ~$5m EBITDA deal at my last firm. It was one of the most stressful times of my life, because 50% of my compensation was tied to that one deal. It got done... but barely. Had to talk the PE buyer down from walking away the day of signing and was constantly in the psychiatrist role with the entrepreneur owner / seller.
One additional point to consider is downside risk. In the event of a recession, what happens at the boutique firm? Do they make cuts? Do deals not close? Do you lose health, 401(k) benefits, etc.? This is a big benefit of working at a more stable MM firm - in the event of a market downturn, you tend to be much better protected.
That sounds exactly like my intuition - that the deals are much more risky - and like anything in finance, if risk is higher than potential return needs to increase to make it worthwhile. No 401k; very basic health benefits. Wish I had data points around what competitors pay - I've heard for a VP 15-20% just for executing is more market.
I see this comp structure highly impacting the culture of the firm. Are you going to have a cage match for every deal that comes in w/ the other VP? You guys are going to hate each other pretty quickly, especially if he is using seniority to grab the high probability deals (these will be easily identifiable to you after a few months).
The founder told me the deals would be evenly distributed, FWIW. But I agree - seems like it could lead to highly disparate comp for same position given randomness of deals closing. One thing I’ve heard as I asked them about their M&A practices / procedures is they sometimes market companies with just quickbooks financials - is that normal? I would think they’d at least have to be reviewed...or is that a normal LMM practice? Seems like you’re opening yourself up to price retrade issues if you’re not making sure financials are reviewed prior to launch.
I work in the lower MM / MM (EV $30M - $250M) and we would require some sort of review prior to going to market. Most of our clients are audited with sell side QoEs pre-launch becoming more and more prevalent.
I have dealt with shitty financials in the past and you are just opening yourself up to a world of hurt in exclusivity when you have lost the competitive dynamics. You can mitigate this somewhat by making sure the rev rec make sense, proper accruals are hitting the IS and EBITDA adjustments are defensible on the front end.
I am not an accountant, so head to head with PwC while they take a chainsaw to EBITDA is not where I want to be.
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