Extracts from Mukund Mohan's post titled "What to negotiate on your investment banking advisory engagement letter":
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private company transactions, valuations and financials in India. Click Here to learn about Venture Intelligence products that help entrepreneurs Reach Out to Investors, Research Competition, Learn from Experienced Entrepreneurs and Interact with Peers. Includes the Free Deal Digest Weekly Newsletter: India's First & Most Exhaustive Transactions Newsletter.
Most bankers typically charge between 2% (highly unlikely, but possible if you are a hot company, with a high probability of sale at a large price) to 7% (smaller transaction, < $5 Million).
...Term of the agreement: Since most M&A transactions take 3-6 months, these agreements will last at least for that duration. Most agreements also specify that if your company gets sold for 6-12 months after the start of the engagement, the investment bank will likely get a portion of the sale, even if they did not make the introduction or help negotiate the final sale. While many will claim it is standard to have a 12 month clause, there is no “standard” – it is all negotiable.
The engagement fee or retainer: To help prepare your documents, pitch deck and start to position your company, the company will ask for a retainer fee between 10% and 20% of the expected final sale price (or about $25K to $100K) – whichever is lower. This fee is purely for them putting the time and energy to get your documents together and is independent of whether they final sale happens. If your company is “hot” many will waive this fee. If you are looking to sell, expect to pay this amount – 50% before they start and 50% after 3 months of the final completion of the agreement whichever is earlier.
...Other considerations. If the buyer directly does not approach you, then in a lot of cases, you will find them to want some protection clauses, such as 3 year commitment for the founders to stay at the company etc. To ensure this happens, they will have an “earn out” amount associated with the sale. That is usually counted as part of the acquisition price, but is paid over time. An investment banker, typically will not have the patience to wait for that period of time or control over the longer term outcome, so they will want their “fee” to be paid in full for the net amount. That’ s something you can negotiate as well.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private company transactions, valuations and financials in India. Click Here to learn about Venture Intelligence products that help entrepreneurs Reach Out to Investors, Research Competition, Learn from Experienced Entrepreneurs and Interact with Peers. Includes the Free Deal Digest Weekly Newsletter: India's First & Most Exhaustive Transactions Newsletter.