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What You Need to Know About M&A Fee Structures

What You Need to Know About M&A Fee Structures

Do you have a start-up to sell, or are you on the lookout for key acquisitions? If the answer to either of these questions is yes, then you may be at a point where you're evaluating M&A advisory firms.


At NorthStar Venture Partners, we work with buyers and sellers every day. One of the most common questions we get from people on both sides of mergers is this:

What does an M&A fee structure look like?

We’re always happy to hear that question and to explain how our fee structure works. In this post, we will explain what a typical M&A fee structure is, detail the differences between upfront fees and success fees, and give you some pointers on how to evaluate and compare fee structures.

M&A Basic Fee Structure

Serving as an M&A advisor involves spending money upfront -- ahead of any deal that might be negotiated. For that reason, M&A advisory fee structure breaks down into two parts, as follows:

  1. Upfront fees, which are designed to cover some (but usually not all) of the M&A firm’s upfront expenses, including market research, pre-deal due diligence, deal document creation, and labor.
  2. Success fees, which are charged only if a deal is negotiated and brought to fruition. 

As you might expect, the size of the fees depends upon the size of the deal. Both parts may be negotiable, but most M&A firms have a set formula they use to calculate fees.

Upfront Fees

Upfront fees fall into two basic categories: commitment fees and retainers. A retainer is a fee that is paid monthly to secure the services of a professional. Most people associate retainers with lawyers and legal fees, but they can be used in a variety of situations and industries.

The commitment fee is usually paid as a lump sum when you sign your contract with an M&A firm. Some firms may waive the commitment fee for small deals. Retainers are almost always paid on a monthly basis and can range from $2,500 up to $10,000 or more per month.

The amount you pay in upfront fees is going to vary depending on the value of your company and the size of any potential deal. As a rule:

  • For deals under $5 million, some firms waive the upfront fee and charge only a success fee -- but that’s not always the case, so make sure to ask.
  • For midsize companies, you should expect to pay between $5,000 and $15,000 per month.
  • For large companies, the upfront fees may be $1 million or more.

You should always read the fine print before you agree to any upfront fee. If you’re being billed monthly, you’ll need to be aware of the timing of your deal.

Success Fees

The success fee is the fee you will pay if the M&A advisory firm helps you to negotiate a deal. They are commonly calculated as a percentage of the deal itself, but there are three variations you should know about.

  1. The Flat Fee. The flat fee, as you might expect, is a flat percentage of the final deal. For example, if you sold your company for $20 million and you agreed to a flat fee of 5%, you would pay your advisory firm $1 million.
  2. The Lehman Formula. The Lehman Formula is a fee structure that encourages M&A advisors to close deals. It awards a lower percentage for the last million dollars than it does for the first. The downside of a Lehman Formula deal is that it doesn’t encourage the M&A advisory firm to negotiate the highest possible price for a deal because there are diminishing returns. This type of structure is also referred to as a decelerant.
  3. The Tiered Structure. A tiered fee structure is the opposite of the Lehman Formula in that it awards a higher percentage to the last million than it does to the first million. In other words, a tiered structure incentivizes the M&A advisory firm to negotiate the highest possible selling price for their client. This type of structure is also referred to as an accelerant.

There are pros and cons to each fee structure and many are dependent on the size of the company you are selling. Because the fees associated with selling a small company are not significantly lower than the fees associated with selling a large one, some M&A advisors will charge a higher percentage on small deals than they do on large ones.

How to Choose an M&A Advisory Firm

When it’s time to choose an M&A advisory firm, make sure you understand the fee structure and how it works. You may want to compare several firms and their fee structures before you decide which firm can best represent you.

It is always a good idea to have an accurate valuation of your company and use it to calculate what your fees would be for each firm. That way, you can make the best decision for yourself and your company.

Do you need help negotiating the sale of your company? Click here to book a call with NorthStar Venture Partners today!

Julien Meyer

Written by Julien Meyer

NorthStar Venture Partners is led by Julien Meyer, MBA. A veteran of the tech community, Meyer is a 3x startup founder with 2 exits, a published author, a Harvard Business School Leading with Finance Alum and a Top Rated Startup Consultant (UpWork, 2018). Meyer advised on over 50 successful transactions before starting NorthStar. His experience has helped him understand the unique challenges that founders experience when trying to exit their ventures.