Earlier this year, we published the 2021-22 M&A Fee Guide in partnership with Firmex on the state of investment banking fees. The data in the report was collected via a 32 question survey that covered everything from exploring retainer pricing, fee structures, fee minimums, reimbursables, and more.
Last week, we sat down with six members from Axial’s investment banking community to get a first hand account of how current events have impacted advisory fees. Topics of discussion included the pricing changes on the backside of the pandemic, the complexity and risk of transaction closure, de-risking deals, and the effects of virtualization.
Thank you to the following Axial members who participated in the discussion:
- Joe Alioto, Managing Director, Madison Street Capital
- Chris Parisi, Managing Director, Carl Marks Advisors
- Gary Grote, Managing Director, Bridgepoint Investment Banking
- Micheal Schuster, Managing Director, Cross Keys Capital
- Matt Miller, Managing Director, BlueWater Partners
- Richard Kestenbaum, Partner and Co-Founder, Triangle Capital
Introductions – 00:00-4:18
Post-COVID changes to contingent fee pricing – 4:57
- There have been instances of clients putting more pressure and pushing back harder on fee retainers. Led to more “flexibility” on the retainer than in normal circumstances.
- As the deal environment has continued to gain strength, and multiples have continued to move upwards, Carl Marks Advisors, as an example, have become more willing to take on more of their fee on the backside.
- Normally the base contingent fee is structured on an expected value that is a likely fair market value. However, more recently, Carl Marks Advisors will take a lower fee, not quite up to that expected value, but then have some acceleration after that point.
- Some firms have actually managed to improve pricing because there are so many potential targets looking to go to market to take advantage of the frothy multiple environment. More supply means more ability to select clients who are not going to ask for fee concessions.
- Data from the survey revealed that some banks charge as high as 7-8% of transaction value. Common in the IPO market but not in middle market M&A. Deals above $50M typically approach 5% on the high end.
Assessing risks with entrepreneurs – 13:42
- Good from the entrepreneurs perspective that there’s a spectrum of pricing out there in the banking community that allows them to shop around before signing an engagement.
- Banks will work backwards from the projected value at close to determine their overall pricing structure for an engagement. Risk and complexity of transaction are two major inputs into that analysis.
- A business’ internal structure (bookkeeping, ability to provide due diligence information, personnel) is extremely important in their ability to get through a deal process, which derisks the overall engagement.
- Important to encourage entrepreneurs to focus on the fit between the buyer and seller. If the fit is there, complexity is a non-issue.
Dealing with a transaction: simplicity versus complexity – 18:00
- The ultimate structure of the transaction needs to reflect the business and its business model. The more straightforward the business, the more straightforward the transaction structure should be.
- Most deals start off being “simple” and become complex as the process goes on. One of the biggest risks that leads to complexity is the client not hitting projections during the sales process. If that’s not a risk in the deal, the deal will likely close.
Assessing expectations and preparedness – 20:56
- There are two kinds of risks for entrepreneurs: doing something different than they did in the past or doing more of what they have been doing in the past and their costs are going to be consistent with what they did in the past, or they are going to understand why they might be different.
- It is important to be focused, selective, and only pursue engagements where they can successfully meet their clients’ expectations and complete a transaction.
- Encouraging sell-side QofEs has been a great way to de-risk a deal. It also shows that the client is committed to doing a deal.
Where M&A advisors add the most value – 29:06
- According to the survey, managing the deal process was the area where banks added the most value to the sale process. Negotiating the deal was second, which includes getting the most value for the deal.
- Understanding the client’s story and then telling it in a way that resonates to the market is also incredibly important. It establishes credibility and showcases what the company does and why it’s unique.
- Clients are often surprised by how complicated the process is. Getting prepared makes for a much smoother process and potentially a better outcome.
- A six figure sale of a product to a customer can be a multi-year process. No surprise that a sale of a business can just as, if not longer.
The effects of virtualization – 40:14
- Conferences are more worthwhile now because people come when it really matters. The people who used to come without real intent are staying home.
- Virtual meetings have made the sales process more efficient.
- Silver lining of Covid – much more facetime with clients, albeit virtual facetime. Preference is still to meet in person.