Seller Beware: Avoid Lump-Sum Up-Front Fees

The biggest problem of the past 30 years in the lower-middle-market M&A industry is lump sum up-front fees. Business sellers should not pay them and M&A firms should not charge them.

Once a business seller cuts a lump sum up-front fee check to the M&A firm, he or she has little recourse if the M&A firm fails to perform. Sure, the M&A firm that charges such a fee may say it has ample incentive to perform (i.e., complete a business sale and earn a fat commission), but some firms charge $30K to $50K up-front and their business is really one of collecting up-front fees rather than selling businesses. Yes, it’s a scam. I’ve written about these firms quite a bit.

Three firms currently conduct seminars around the country, claim to be a “Wall Street style investment bank,” hide behind confidentiality to avoid giving references, and claim to “invite” only a few select companies. It’s bogus, but you really can’t tell by looking. They have all of the appearance of a firm that really gets deals done. That’s why they’re collecting hundreds of fees each month for hundreds of millions of dollars each year. Sure, they sell a few companies, but former employees of these firms admit it’s less than 5%. Want to pay $40K for a less than 5% chance you’ll get the deal you want?

The Big Boys Don’t Charge Up-Front Fees:

The billion-dollar investment banks such as Goldman Sachs, Merrill Lynch and Prudential don’t charge up-front fees. They can afford to do this because:

1. The sellers of billion dollar companies tend to be less inclined to risk wasting their investment banker’s time. This is because they tend to:
   

   • Highly value their relationship with their investment banker.
   • Have long term relationships with their investment bankers.
   • Closely guard and maintain their reputation among the investment bankers.

2. The fee they stand to gain if they get a deal done can be multi-millions, so they can risk wasting time on deals that don’t get done because the deals that do more than make up for the loss.

Neither of these two elements exists in the lower-middle market (i.e., deals valued at less than $100 million).

Middle-Market Firms Charge Up-Front Fees:

Up-front fees are the norm in the lower-middle market. That is, deals between $5 million and $100 million in value. The industry has evolved in this manner because the “no up-front fee” business model just does not work in lower middle market. This is because the two important elements described above in (a) and (b) don’t exist in this space, namely:

1. The success fees for completed transactions in the $5 million to $100 million range are not so large that the firm can afford to waste a lot of time and money on transactions that don’t close.
2. Sellers in the lower-middle market are much more willing to risk “wasting the time” of investment bankers that deal in transactions in their size range. This is because they tend to…
   

   … not have long-term relationships with “brokers” or ”bankers” that work in this space.
   … be less than sure of the skills and abilities and “value add” of their “bankers.”
   … (for the reasons above) be much more willing to potentially waste the time of an M&A advisor or M&A firm.

For these very real reasons, M&A firms that serve the lower-middle market— at least those that are of any quality and therefore are able — do charge fees. Only by charging somes fees can the M&A firm:

• determine whether the seller is serious (i.e., weed out those that are not fully committed or serious).
• afford to spend the large amounts of time that an M&A transaction requires (when done “right”).

The Devil Is in the Details.

High-quality M&A firms that serve lower-middle-market size companies do charge up-front or “ask you go” fees. But no seller should ever pay a large lump sum up-front fee. Any firm that charges one should be questioned as suspect. Ditto for firms that ask you to sign an agreement that prohibits you from cancelling your agreement and/or requires you to pay a success fee for a period of time even if you cancel and sell the business on your own or through another “broker.”

Acquisition Advisors is a lower-middle-market M&A firm for business sellers that wish to quietly and professionally secure maximum value. We charge an up-front fee for the reasons stated above. To be fair, however, and to protect the seller and show our good faith, we:

1. Spread the fee obligation out over the first six months. During that period we outline things we will do, such as prepare the recast financial statements, estimate market value, prepare the offering documents, prepare the outreach plan, compile prospect call lists and “do not call” lists, present to seller proposed buyer-confidentiality agreements, etc. So the seller client gets tangible things in return for the retainer payments.
2. Allow the client to cancel the agreement anytime. So if the client gets cold feet or we are not doing what we said we would do (see (1) above), the client can avoid future payments. In other words, we don’t make our clients sign an agreement that binds them to making monthly payments regardless of our performance.
3. The monthly payments are refunded out of the Success Fee once the business sells.

Business Brokers.

Firms that tend to sell businesses valued under $1 million in value are generally referred to as business brokers. Businesses valued under $1 million tend to sell to individuals who live near the subject business. Individual buyers are much different from industry buyers (i.e., companies) and private-equity buyers, and the process used to sell a company to an individual is much different from the process used to sell a company to an industry buyer or private-equity group.

Owner-sellers of small businesses are much more price-sensitive and many business brokers charge low or no up-front fees. For this reason, the business broker will protect himself or herself by minimizing the time he or she spends on any deal. In this way, and because the buyers are mostly individuals, the business brokerage firm is much like a real estate agency: lots of listings, not a lot of work on any of them, hope a buyer comes along who likes it and has the money and moxy to buy.

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In the lower-middle-market space, up-front or “as you go” fees are common, and the best firms require them. But no seller should pay a large fee to an M&A firm that’s 100% up-front in a single lump sum. It just doesn’t make sense, and odds are, if the firm you are talking to requires this type of fee it’s of the big national seminar-based operations. Thousands of business sellers accept invitations to their seminars each year, get wowed by the presentation, then succumb to the hard sell and pay a big up-front lump sum fee. It’s hard to find any that actually receive anything of value in return.

Selling a business is time-consuming, complex and risky. Business sellers need help, and skilled advisors can add substantial value. But insist that any agreement you sign is cancellable without penalty and that any fees you pay are spaced out over time as real and meaningful work is completed to your satisfaction.