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The Price of Professional Exit Planning Guidance

By Generational Equity

02/25/2019

In last week’s blog post you may recall that we examined how valuable an M&A advisory firm can be to business owners who are interested in an eventual exit. Several benefits of hiring a professional firm were examined, including:

  • Having an M&A advisor handle your transaction allows you to focus on running the business.
  • You will most likely get an optimal deal with a professional handling negotiations on your behalf.
  • Your deal is more likely to close with less headaches and hassles for you.
  • Skilled and experienced M&A advisors have access to significantly more buyers than you will.
  • The potentially troublesome aspects of due diligence will be greatly aided by having an M&A pro by your side.
  • Since you will probably only sell one company your entire professional life, do you want to learn how to close a transaction on the job?

These are just some of the benefits, and there are plenty of others we could list.

But, this raises the question: Based on these benefits, what should I expect to pay a professional M&A advisory firm to guide me through the process?  

Keep in mind that like all decisions you make, you can go cheap and “hire” your Cousin Larry who has a real estate license but has never sold a company in his life. Or, you can find a local business broker who may sell 1-2 companies a year and conducts most of his marketing at the local country club over gin and tonics.

However, if you want a truly experienced team to represent you, one that will be with you through the entire exit process from the initial business evaluation, the creation of value building/enhancing strategies, development of a thorough list of buyers (including those outside of your industry and local market), and finally, represent you at the negotiating table, you will need to invest some money upfront.

The Value of Exit Planning Guidance

Nearly all professional exit planning firms will require an initial fee for their services. Our friends at Axial have provided some guidance on this:

To work on your behalf (known as a “sell-side engagement”), an intermediary can be engaged under a retainer fee, a success fee, or a combination of the two methods. Retainer fees, also known as work fees, typically start at $50,000 and go up depending on the size of potential transaction. Some retainer models involve a monthly installment ($3,000 to $15,000), while others are arranged for a term at a flat fee.

The success fee percentages can be structured in several ways. On smaller deals, the success fee may be a flat percentage — usually 6% to 12% — of the transaction. On large deals (over $50 million), that flat percentage can drop to as low as 1.5%. The workload required by an intermediary to close a deal does not differ tremendously based on the size of the transaction, and actually can be less work for larger companies considering the increased access to resources.

Generational Equity’s business model is very similar to that described above; however, unlike many M&A intermediaries, we deduct the cost of the initial retainer from the seller’s eventual success fee. (Our only exception exists in California where state laws do not permit this, so in California we adjust the success fee at the end to account for this.)

What is Professional Exit Planning Advice Worth?

The important issue to remember is this: You get what you pay for. Again, you can go cheap and hope for the best or you can invest in your success based on the track record of the M&A firm you hire.

The good news is Generational Equity has a proven record like no other M&A intermediary in North America. In fact, based on Thomson Reuter’s data, no one has closed more transactions over the last decade in the lower middle market than our firm. You can see this using the league tables published on our website every year:

I can guarantee you that no local broker, nor your Cousin Larry, can match our track record. 

One other item to consider regarding the retainer fee: It indicates to buyers that you are truly a committed and willing seller.

This actually turns out to be a tremendous benefit to you when we begin to talk to buyers on your behalf. The one thing that all professional buyers lack is time.

Right now, they have plenty of capital to spend, but they can’t find the time to spend it. These buyers don’t want to risk spending 3-6 months going through due diligence with a target only to have them back out at the 11th hour – that is a tremendous waste of time and resources. 

Having “skin the game” in the form of an up-front fee can give buyers confidence that you will actually fully engage and close the transaction.

To learn more about why we are worth hiring if you are planning to exit in the next 1-5 years, please see the following links:

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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