Skip to main content

Investment Banking Terms

Image
By
Extracts from Mukund Mohan's post titled "What to negotiate on your investment banking advisory engagement letter":

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.
Labels:

Popular posts from this blog

How I Raised Funding - Priyanka Agarwal, Wishberry

By
You have to be confident and shameless while crowdfunding. Priyanka Agarwal, Wishberry shares on how to succeed in crowd funding with Venture Intelligence in this  interview. Priyanka also candidly shares how the team built Wishberry, raised funding from top angel investors like Rajan Anandan, on pivoting, and difficulties in raising capital for entrepreneurs operating in niche spaces not chased by VCs. Q: What does Wishberry do? Priyanka Agarwal : In its latest avatar, Wishberry has pivoted into crowd financing of low budget films (INR 1-5 Cr). We are essentially trying to create an internet platform for investment opportunities for HNIs in films including Marathi, Tamil, Kannada, or films targeting the global diaspora. L-R: Co-founders Anshulika Dubey & Priyanka Agarwal, Wishberry Given that you are building a marketplace, how did Wishberry solve the Chicken and Egg problem? Beyond the “all or nothing” model what did Wishberry do to pull in more artistes and inves
Read more

WTP: A Very Important Business Abbreviation

By
Did you know the most profitable car of sports car maker Porsche is actually its family friendly SUV Cayenne? Wait what! How? Enter building to Customer's Willingness to Pay (WTP). In a FirstRound.com post   Madhavan Ramanujam, Simon-Kucher & Partners , shares the story of Porsche's counter-intuitive move in the mid 1990s. In the mid 1990s Porsche's annual sales were a third of what they’d been the decade earlier when it almost died. The company badly needed a turnaround.  So Porsche "designed the car around what customers needed, valued and were willing to pay for – in short, around its price. All the items customers weren’t willing to pay for, like Porsche’s famous six-speed racing transmission, were thrown out, even if their engineers loved them." In contrast Fiat Chrysler, which was also looking for a hit, " focused its development process on engineering and design, settling on a price for the car at the very end .  Market performance wa
Read more

Profile of Career Forum founder

By
The Starship Enterprise column in The Economic Times (not available online), featured Sujata Khanna of entrance exam training institute, Career Forum. The company, which started with just seven students in Pune, now covers over 39 cities reaching over 15,000 students. ...The most important milestone I think was in 1995 when we decided to incorporate Career Forum into a Company. This brought in a lot of professionalism and we also went for expansion. ...Strong technical network is our unique selling proposition. We have a strong ERP system running across all centres in all areas of business from distribution to logistics... Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the Private Equity and Venture Capital ecosystem in India. View sample issues of Venture Intelligence India newsletters and reports.
Read more