Investment banks play a crucial role in facilitating mergers and acquisitions (M&A) transactions. Their main job is to provide financial advisory services to clients who are looking to buy or sell a company. Investment banks earn fees for the M&A advisory services they provide. There are several types of M&A investment banking fees charged during an M&A deal. Understanding how these fees are structured and calculated is important for companies exploring strategic M&A options.
Retainer fee charges an upfront fixed amount
Investment banks typically charge an upfront retainer fee when first engaged to advise on an M&A deal. This fixed fee ranges from $50,000 to $150,000 depending on the size and complexity of the deal. It compensates the investment bank for the time and resources spent on initial work such as preparing pitch materials, developing financial models and conducting preliminary valuation analysis. The retainer fee is credited against the success fee if the deal goes through successfully.
Success fee depends on M&A deal value
The core component of investment banking fees is the success fee, which is a percentage of the transaction value. For large M&A deals, success fees are structured as a sliding percentage based on deal size. For deals under $100 million, the success fee percentage is higher in the 4-5% range. For deals between $100 million to $500 million, the average success fee is 2-3% of deal value. For deals above $500 million, the sliding success fee scale continues downwards, with 1-2% being common.
Fee structures differ for buy-side and sell-side
Investment banks earn higher success fees on the sell-side, advising the target company being acquired. Sell-side fees are usually 100 to 300 basis points higher compared to buy-side deals. This pricing difference exists because sell-mandates tend to be more competitive and the deal stakes are higher for targets. Buy-side success fees tend to be tiered, with the percentage declining as deal size increases.
Tail fees cover a set period after M&A closure
Investment banks also charge a tail fee structured as a percentage of the transaction value when an M&A deal closes successfully. The tail fee covers the bank for a specified period, usually 6 to 12 months after the deal closes. If the acquirer or target is acquired by another company during the tail period, the investment bank earns an additional payout. Typical tail fee percentages range from 0.25% to 1% for large mergers and acquisitions.
In summary, M&A investment banking fees have several components – retainer, success and tail fees based on deal size and value. Understanding fee structures help clients pick the right advisor bank and ensure optimal deal pricing.