If you’re considering selling your business, you may find it extraordinarily difficult—if not impossible—to estimate the fees you’ll pay your attorney, accountant, banker, and anyone else involved in the sale. That’s because there is really no certain way of knowing during the early stages of an M&A transaction. Just as every business is unique, there’s no such thing as a typical merger or acquisition. This said, however, there are two aspects that can be ascertained: 1. M&A is complicated and complex; and 2. consequently, M&A can be expensive.
Keeping the open-ended nature of M&A in mind, however, it is possible to come up with ballpark estimate of the eventual cost of selling your business.
Be prepared to spend at least five to ten percent of your final sale price. In dollars, that may vary between $50,000 and $2,000,000 in the aggregate (with legal fees typically in the range of $25,000 to $125,000). No industry-standard range exists. Rather, fees depend on the size, scope, and complexity of the deal as well as each individual’s advisor rates.
Below are some of the factors that determine the costs of sell-side M&A:
Professional Fees
In general, M&A advisors and investment bankers typically ask for a percentage (e.g. 3–7%) of the final sale price. The percentage is usually higher for relatively small transactions and lower for larger ones.
Accountants’ and attorneys’ fees often depend on the scope and duration of their work. If you need assistance safeguarding your intellectual property, for instance, or expect to face a complex web of tax requirements, get ready to pay more for legal and accounting services.
Fees are almost always negotiable, because every team member has an interest in seeing the deal through. Accordingly, each of these professionals may also charge a retainer fee of several thousand dollars per month to incentivize sellers and protect themselves if the transaction gets stuck in limbo.
Different Fee Structures and Pricing Models
The way you agree to pay your advisory team matters. Given the various pricing models and fee structures out there, take careful consideration before you settle on one option. Even if it’s not immediately obvious, your choice could save you a lot of money down the line.
Advisors ask for fixed fees when they recognize that the business has a low value and believe the deal is a sure thing. Flat dollar amounts are common in simple transactions between close colleagues or friends who only nominally need M&A expertise.
Advisors may charge on an hourly basis when they’re only involved in one or two phases of the deal, or during a distressed M&A transaction where there are fewer protections and certainties.
Percentage-based fees are where M&A professionals realize larger gains. Your advisor may agree to a flat percentage, or adeclining percentage scale such as the Lehman Formula, where compensation decreases by a percentage point for each $1 million involved in the transaction. A Reverse Lehman sounds like bad arrangement until you consider that it motivates your team to secure the highest possible payout from your buyer.
There may also be a minimum fee, as well as break-up fees precipitated by withdrawing from the deal during late-stage negotiations.
Additional Factors
Make sure to budget for other factors outside of fees. Learn your tax obligations early and set aside a little more than you think you’ll need.
Plan ahead for any roadblocks that may impede deal progress. You don’t want to run out of cash as you’re drafting agreements and discussing terms. And remember: the longer a transaction goes on, the more your fees go up. Transactions that languish cost much more than deals on a strict timeline.
Finally, think about your objectives after the sale: Are you counting on the sale to fund all or a portion of your retirement or new business venture?
Mergers and acquisitions can feel overwhelming at the beginning. The good news is you don’t have to do it alone. Read my easy guide to pre-transaction planning.
ABOUT MICHAEL N. MERCURIO
Business attorney and M&A lawyer Michael N. Mercurio serves as outside general counsel on matters related to business law, M&A, and real estate law. As a strategic partner to firm clients, Mr. Mercurio regularly counsels entrepreneurial individuals and assorted entities on all aspects of business and commerce, with a core specialty in mergers and acquisitions—both from the sell side perspective and buy side perspective.
ABOUT OFFIT KURMAN
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