Mergers and acquisitions are a routine type of deal in the business world, a typical type of transaction. Although there are many different flavors of mergers and acquisitions, there are many similarities between them. One common thread that runs through all of them is deal fees or private equity fees. Knowing about these fees is key to helping you understand the big picture of mergers and acquisitions.
Basics of Mergers and Acquisitions
Simply put, mergers and acquisitions (M&As) are when two entities merge, or one acquires the other. As already mentioned, there are many types of M&A, and while they’re all unique, they all have several things in common. One of those items has to do with finances: M&A deal fees.
What Are M&A Deal Fees?
As in virtually every other business transaction, paying the cost for one thing or another is standard practice, and M&As are no exception. Buying, selling or merging your company is going to cost you somewhere along the way, and it’s important to know who is going to charge you and how much. You don’t want to overpay, but conversely, you don’t want to pay too little to an inexperienced person or company and deal with those consequences later.
Types of M&A Deal Fees
There are many categories of deal fees that arise when you embark on an M&A. These include investment banking fees, legal fees and accounting fees, among others. Some of them will be hourly (legal, accounting), while others are flat rate (such as an investment banker’s fees). Needless to say, as in any business deal, getting good advice is paramount. Having competent, highly experienced legal counsel on your team will pay dividends by the time all the dust settles on the completed deal.
Common types of M&A deal fees include:
1. Legal fees
This is typically a large expense, as legal know-how doesn’t come cheap. As referenced earlier, lawyers (and their underlings) charge by the hour. Knowing that, understand that the more legal untangling your counsel must undertake, the more expensive the total bill is going to be.
Items that affect legal fees include environmental and IP issues, labor and employment issues, the complexities of the other company in the transaction, regulatory filings and tax issues, among many others. Rates for legal help will vary widely depending on these issues, but it’s best to always be prepared for the higher end of your estimate.
2. Accounting fees
Similar to legal fees, accounting fees can vary greatly, but they’re almost always a by-the-hour proposition. A lot of this is a deep dive into the finances of the other company, a sort of forensic accounting if you will. Not only does this due diligence look into the past, it also has to validate key assumptions to confirm that the financial forecasts are somewhat correct.
What affects accounting fees? Again, the complexity of the transaction and the time required to fully dissect and analyze the books are going to show up in the price at the end. And you must also be aware that any findings in this phase of due diligence can easily affect the final price of the transaction, either for better or for worse.
3. Investment bank retainer fees
Sometimes referred to as an engagement fee, an investment retainer is an upfront fee paid to the investment bank. Generally, investment banks require a retainer for this type of work, with both one-time payments and monthly retainers are common. In most instances, any unused retainer funds are credited to the success fee, which is described below.
These fees can vary from situation to situation, as the size and complexity of the transaction dictate how much this is going to cost you. The larger the transaction is, the larger the retainer fee will be. The retainer fee amount will also depend on how much the investment banker anticipates will be needed at the outset of the deal.
4. Investment bank success fees
As the name suggests, the success fee is paid to the investment bank for a successful outcome in the M&A process. This is very common in the investment banking space, and in many situations, the investment banking team operates solely on this type of fee, much like how a salesperson works on a commission basis.
The size of the fee, which is quite similar to the retainer fee, is all based on the total amount of the deal, so the larger the transaction, the higher the success fee will be. The way these fees are structured is an incentive for the investment bankers to do their best to achieve the best deal for their clients. Unlike the retainer fee, this is a contingent agreement, something that will only be paid if the outcome of the transaction is positive, as agreed to previously.
How M&A Deal Fees Are Structured
As already mentioned, M&A deal fees are dependent on the type of service performed, with some tallying hourly work performed and others following a more complex formula.
- Legal fees: These are typically calculated hourly, with legal counsel commanding higher rates and other legal professionals on the case charging less per hour.
- Accounting fees: Similar to legal fees, accounting fees are also typically on an hourly rate, with the total depending on the complexity of the transaction. In addition, hiring one of the Big Four accounting firms will cost you more, as you’re paying for name-brand recognition, credibility and marquee value.
- Investment bank retainer fees: There are many ways to structure these retainers, and these figures vary, from four figures for monthly retainers to six figures for a one-time or flat-fee retainer.
- Investment bank success fees: These fees can be a fixed (generally lower) percentage up to a certain target baseline, then change to a higher percentage for amounts that go above that target. In this case, it’s in the best interest of the investment bank to strive for the highest dollar amount.
A Vital Tool
Every type of corporate transaction needs access to a virtual data room (VDR). A VDR (often referred to as a “deal room”) is a secure, online location used for document storage and distribution, which allows all parties to review, share and update documentation connected with the transaction. VDRs are commonly used during all phases of M&As and other corporate development activity.
The CapLinked Solution
CapLinked, an industry leader in the VDR space, provides VDRs that include secure access, enterprise-level encryption, multiple layers of security and user-friendly admin controls compatible with multiple operating systems. Visit CapLinked today to see how your business deal can be made far easier — and less expensive.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.
Divestopedia – A Summary of M&A Fees for Sell-Side Transactions
iMerge Advisors – M&A Advisor Fees ”“ iMerge Advisors
Corporate Finance Institute (CFI) – Success Fee
Wall Street Mojo – Success Fee