The fundamental hypothesis regarding Advisor fees is that the fee and the amount of fee is in consideration for a constellation of services for originating, marketing, facilitating, negotiating, and closing a deal, which goes beyond merely introducing the parties or bringing the buyer and seller together. Simply introducing parties to a transaction constitutes a finders’ fee or perhaps a referral fee and is considerably less costly than a typical mergers & acquisitions Advisor and/or advisory fee.
The M&A Advisor is entitled to a fee for services rendered to search, identify and originate business opportunities, convert prospects into genuine deals, cause a meeting of the minds and bridge gaps between the parties, and facilitate the closing of an agreement, including arranging of and participation in discussions between the parties, qualification of and investigation of the viability or feasibility of the business opportunity and assisting in structuring the transaction, in identification, collection, and distribution of due diligence data and negotiations. Before the closing, unless the parties agree to a retainer, the seller Advisor is generally not entitled to payment. Thus Advisor is at the risk of no remuneration subject entirely to whether or not a closing occurs.
The facilitation efforts by the Advisor are continuous and unbroken from deal initiation to closing. In essence, there is a direct and proximal link between the M&A Advisor’s activities and the deal’s consummation, whether it be merger, acquisition, or divestiture, so that there is a continuing connection and intervention of the Advisor’s efforts and the ultimate closing of the acquisition.
The typical M&A fee is typically calculated as a percentage of the total enterprise value of the deal, calibrated at a level to compensate the Advisor for the value of their services and for assuming the risk of not getting paid.
There are, however, two important caveats to the above:
- While the M&A Advisor performs facilitation, the amount and scope of facilitation always under the circumstances of every deal, and thus the legal basis for qualifying for a fee is introducing the buyer to the seller, including if the buyer is referred to the M&A Advisor because the buyer made an unsolicited inquiry to the seller regarding purchasing the business.
- Because most M&A Advisors are working on a contingent commission basis only, to level the risk allocation playing field between the Advisor working with no compensation and no certainty of getting paid and the Client receiving a boatload of services as described above, the Advisor is entitled to an exclusivity arrangement, whereby during the Term (and mutually agreed post-agreement period, or the “Tail”) of the Advisor-Client agreement, the client is obligated to furnish and refer to the Advisor the names of all persons or business entities (or their authorized representatives), without limitation, who contact the Client or who have contacted the Client regarding the purchase of the business for sale. This means any contact with the Client regarding purchasing the company, whether by phone, email, letter, or meeting in person, is covered as a triggering contact event under the exclusivity paradigm. It is not for the Client to measure or determine the sufficiency of the contact or purchase inquiry unilaterally. Some sellers may be incentivized to consider all unsolicited contacts to not rise to the level of a bona fide purchase inquiry, thereby cheating the M&A Advisor out of a fee if a successful transaction occurred from one of these so-called innocuous contacts or inquiries. Anything is possible. Therefore, the Client must turn over all such communications and inquiries to their M&A Advisor.