Yet, people are still expecting them. They were lulled in by the siren song of ‘FREE’. You can’t blame them, when things that were once paid for, are now being given away for FREE, how can you ignore it.
FREE is the most attractive word on the internet, so much so that people are still fooled by it, despite them knowing all too well, that there’s always a catch. As one of our friends said, if you’re not paying for anything – then you’re the product.
Listen, free isn’t really free. It’s a myth.
One of our placement friends who raises capital for large funds narrated an interesting true story. He was introduced to a fund manager who was trying to raise $100 million. When he proposed his retainer and success fee for helping them, they retorted back – “we don’t pay retainers!”
So our friend politely asked them if they were managing a fund, and then asked if they were planning to charge any fees for that. The fund manager blurted out, that they would charge the “2% industry-standard management fee”.
So our friend asked them what this was for, and the manager went on a tirade of all the things they had to do with the fees, as he tried to justify that 2%.
“So, it’s okay for you to charge a fee for your services, but not okay to pay me one?” our friend asked.
Some times and I believe this is a regional thing – from what I understand, India and the Middle East are averse to paying any retainers. There are a couple of reasons for this, ranging from – we just don’t pay, we’ve paid before and found little results, we can’t afford to pay our board won’t allow, why should we pay you, when the big four are not even charging us, to… there are many investment bankers out there willing to work on success fee basis only.
To those who don’t want to pay, I can only wish them the best. Here’s some insight, in larger & more established institutions this is what happens when you don’t pay a retainer – your pitch deck starts at the top of a pile, and then it is shopped around with a couple of prospective investors to see who will take the bait, and this will go on for two if not three weeks max. If nothing works out, the next pitch deck, that could be better than yours gets shopped around and yours slowly moves to the bottom of the pile.
They won’t tell you this, because they don’t want to spoil a relationship, but hey, you have nothing to lose since you’ve not paid for anything!
In Europe and UK, I’ve noticed that people are skeptical if you don’t charge a retainer, this is because they feel you’re not taking things seriously, and you’re not really going to do anything for free (who does anyway). This is because they value the time and effort that goes behind raising capital.
If you’re still reading, that’s because you value the time and effort placed by people who work for/with you.
Whenever someone asks us to do pro-bono, unless we find a benefit besides the euphoria from being angelic – I ask the question, do you pay your employees for working, if the answer is yes – then what makes our work valued less than theirs?
So let’s break things down both from a business advisory point of view, and from a transaction advisory point of view (which may include elements of investment banking and business brokerage).
If you’re into transaction advisory, investment banking or business brokerage – fees can be classified as follows:
- Retainer Fee
- Success Fee
- Other Fee
Also known as an Upfront Fee, or Commitment Fee, or Engagement Fee or Work Fee can be in the form of a flat (capped) fee paid out one time or in monthly installments. Some times, Retainer Fees can be netted off against the Success Fee, and should in no way be larger than the total Success Fee.
If there’s no retainer involved, the commitment of the seller can be questioned, unless of course, some sort of Breakaway Fee or exclusivity is in place.
Typically larger institutions can charge higher Retainer Fees, given their higher overhead costs. At the end of the day, working to prepare a company for a transaction is an opportunity cost, as there are only so many hours in a day.
Every now and then we come across business owners who are not really motivated sellers, they just want to get the feel-good factor of how much their company is worth or they’re just curious. This is taxing for anyone who is serious, so having either a Retainer or Breakaway Fee can help filter out these types.
Also known as Introduction Fee or Backend Fee. This is paid upon the closing of the deal and can vary depending on the size of the transaction and forms the larger chunk of any fees.
Typical investment bankers use the Lehman or Double Lehman (for smaller deals) formula. Unfortunately, both these formulas do not align the interests of the seller with that of the intermediary (broker or advisor) because, for every incremental increase in value, the intermediary makes less money. On the other hand, an increasing success fee tier would incentivize the intermediary to push for a higher valuation.
So how much do success fees scale with the transaction size? Check out the chart below:
This includes variations such as minimum fee, breakup / breakaway / drop-dead fee, and OPE or Out Of Pocket Expenses associated with the deal or transaction. Some times, this can include non-cash payments or payment-in-kind, in the form of stocks, options or warrants.
- Minimum Fee – guarantees the advisor will receive a minimum amount upon closing the deal. This is included when it is not sure at what transaction value the deal will go through, and typically found on smaller deals.
- Breakaway / Breakup / Drop Dead Fee – closing a deal takes time, some times months. This fee is to discourage a seller from backing out a very advanced stage of discussions. This can fee can some times be as high as 50% of the entire transaction value.
- Out of Pocket Expenses (OPE) / Ancilliary / Reimbursements – if not included as part of the retainer, then this could be included separately, and upon either prior consent or with a cap. This could cover travel, hotel or other per diem expenses.
At the end of the day, there is no hard and fast rule. In fact, given the uniqueness of every deal, fees are always a subject for negotiation. If you’re not in a rush to sell your business and you can afford to wait, then you’ll be able to negotiate a lower fee.
Most investment bankers, business brokers and transaction advisors don’t advertise their fees anywhere on their website.
We’re not into transactions above $25 million right now. But in either case, we will apply our Pitch Process Framework to ensure that the investors we approach, have a nicely packaged well-baked deal, ready for them when they interact with our clients.
This requires effort and we charge a one-time Preparation Fee of $5,000 for larger companies and $2,500 for smaller companies.
From what we’ve seen so far, this is highly appreciated by our investor network as there is less back & forth trying to understand the company, it’s business model and other relevant information, as a result, we can shorten the due diligence phase.
Ultimately, fees are an inevitable part of business transactions. If you ever come across someone who does not charge you a fee, you should be skeptical of their quality. This goes without saying, do your due diligence on your advisor as well, ask for references or background checks.
The process of buying and selling is complex, and quite often challenging – so having on your side, an advisor who can help you successfully navigate the process, manage valuation expectations and understands the timing of business cycles and market environment is essential.
To give you an idea of the level of effort that is required at each step in the process, study the following: Buy-Side, Sell-Side & Capital Raising processes.
If you don’t understand the level of effort, the time required and the number of tasks required to sell or buy a company, you’re better off just hiring an advisor in any case, so you can focus on running your business. Time is not money, it’s more than money.
P.S. As the insider saying goes, you can sell for whatever price is asked, so long as you control the terms. Case in point, there’s more to selling than getting a higher transaction value, for instance, business owners would love to sell to Berkshire Hathaway even if they get a smaller price, because of the benefits of being under their umbrella.