Results: The Intermediary’s Fee: Structuring
the strengths of the Association for Corporate Growth (ACG) is its
networking capability, and the sharing of information. Over the years ACG
has surveyed its members for many purposes — for general customer
service, for individual sector interests, and for evaluation of specific
programs and events.
Hypotenuse Enterprises, Inc. completed, in conjunction with ACG, a survey
of yet another type — business practice among ACG’s 710 intermediary
members. The reason for such a survey is that by understanding our common
practice, our member intermediary firms might become more knowledgeable
and effective. The purpose of the survey is strictly information sharing.
are no conclusions on best practices, and no recommendations, implied or
explicit. There is simply the reporting of “the way it is,” according
to the intermediaries who are survey respondents.
the results reported are statistically significant for the survey
respondents, there is no way to assure that those who chose to respond are
a representative sampling of the 710 intermediary members of ACG. There is
always the possibility that those who charge higher or lower fees, do more
or fewer deals, or have or do not have fee collection problems were more
or less likely to respond to the survey. Additionally, there is no way to
assure there are not multiple responses from the same firm, as many
intermediary firms have multiple members in ACG. Nevertheless, the survey
results do present interesting information that ACG has not previously
the 71 0 members to whom the Intermediary Practices Survey
was mailed, 126 responses were received, a response rate of 17.7%.
Size of Firms
are characterized by the size of their firms, based on the number of
professionals engaged in intermediary activity. Possible responses were
divided into four categories: “1-5”, ‘6-10” “11-25”, and
“greater than 25” professionals. See Chart A.
90% of the respondents are in firms with 25 or fewer intermediary
professionals, and more than half of the respondents are in firms with
five or fewer professionals.
method of characterizing the responding firms is by the number of deals
completed in the past five years. The results show approximately 60% of
the responding firms completed fewer than 50 transactions over the past
separated these data by firm size, illustrating that larger firms do more
respondents are also characterized by the size of transactions they
complete. Looking at the entire population of respondents over the past
five years, the average transaction size is reported as $15.3 million.
The average transaction size for those firms with more than 10
professionals is 60% higher than those firms with ten or fewer professionals.
survey respondents, approximately 13% perform sell-side only services,
while only 3% are solely buy-side. Buy-side and sell-side
intermediaries comprise the remaining 84% of respondents. Thus, in discussion of
responses by “sell-side respondents,” 97% of the survey respondents
are represented, and “buy-side respondents” represent 87% of the
transactions completed by respondents in the past five years, nearly 70%
were sell-side and 30% buy-side. Intuitively, one might expect an
approximately equal split, given that there are two sides to every
negotiating table. The fact that the respondents have more than twice as
many deals on the sell-side as the buy-side may indicate that the
intermediary population surveyed is less likely to be retained on the
buy-side, that buyers are likely representing themselves, or that there is
a bias in the survey results toward sell-side representation.
of possible buy-side services was provided for the respondents from which
they could select services to characterize their business activities. The
most frequent responses in decreasing order are deal structuring,
negotiating, introductions, valuation, analysis, financing, market sector
evaluation, and management advisement, all being mentioned by more than
70% of buy-side respondents. Less frequent mentions, less than 30%, are
opinion letters and post-deal integration plans.
most frequent mentions of sell-side services in decreasing order are deal
structuring and negotiating, receiving and evaluating offers, qualifying
buyers financially, contract review, market sector evaluation,
presentation of a “value added” buyer, valuation estimates, management
advisement, extensive marketing to buyers, and handling due diligence. All
the foregoing mentions were mentioned by more than 70% of sell-side
respondents. Only 30% of respondents mentioned opinion letters.
frequently mentioned transactions, other than acquisitions and
divestitures, include joint ventures, strategic alliances and licensing.
Among the least mentioned transaction types are R&D partnerships.
mentioned by more than 50% of the respondents include financing, strategic
planning, consulting on corporate development, and venture capital.
Services that are mentioned by less than 20% of the respondents include
portfolio management and post-deal integration.
responsibilities mentioned include "advising," "mailings,"
"financing strategy," "research and documentation,"
presentations," and "memorandum and presentation materials.
compensation principally falls into two categories: retainer and success
(contingency) fees. With respect to success fees, straight Lehman Formula
and Modified Lehman are the most frequent mentions for both the buy-side
and sell-side, and are summarized in the survey report.
average minimum success fee on the buy-side is $140,200 and on the
sell-side is $150,700.
respondents’ minimum fee is 7.5% higher than the buy-side
respondents’ minimum success fee. Only 12.7% of buy-side advisors
sometimes reduce fees for reduced services, but no such alternative fee
adjustments are reported by sell-side advisors.
sell-side, no respondents report working on retainer only, but 10% report
working on a success fee only basis. The remaining 90% receive a retainer
plus a success fee. Sell-side retainers range from a low of $1,500 to a
high of $150,000 per month. When the monthly average retainer
is multiplied by the number of months paid, the average retainer is
slightly over $60,000.
80% of the respondents report crediting back all or part of the retainer
against a success fee and, while the range of credit is from 5% -100% of
the retainer amount, the average credit back is slightly more than 90% of
the retainer paid, with many respondents reporting 100% credit of the
retainer against the success fee.
survey also asked about consulting fees. Consulting fees range
from a low of $60 per hour to a high of $2000 per hour. The average
consulting fee is reported to be $224 per hour.
retainer range for consulting is reported from a low of $500 per month to
a high of $1 million per quarter for defense work. The average consulting
retainer is detailed in the survey, as are the one-time up-front consulting retainers.
survey also focuses on the key terms of engagement agreements. The average
period of a sell-side agreement is 11 .2 months, slightly less than the
buy-side agreement term of 13.0 months, with a wide range.
"tail" of the agreement is defined as the period after which the term
expires but a fee would still be paid to the intermediary if a transaction
were completed. Approximately 90% of respondents report that their
agreements contain a tail. Both the buy-side and sell-side tails are
detailed in the survey.
survey also inquires about exclusivity of buy-side and sell-side
assignments. Exclusivity is more common in a sell-side engagement, with
93% reporting exclusive agreements.
fees are paid based on a definition of the purchase price, and certain
adjustments to the purchase price. When liabilities assumed by the buyer are
added to the purchase price items as bank or other interest bearing debt,
liabilities, installment notes, contingency payments and trade payables
are mentioned by some respondents as being included in the purchase
price for fee calculations. However, fewer respondents report
subtracting cash and/or marketable securities from the purchase price to
arrive at the transaction value used for fee calculations.
payment terms, virtually all respondents say their agreements specify
payment at closing, and most respondents do receive payment at closing. When
part of the purchase price is contingent or delayed, approximately 75% of
the intermediaries make a provision to collect a fee on deferred
transaction amount. The survey details how deferred payments
survey asked about indemnification by or of the intermediary. Of the 80% that have some
indemnification, the client is indemnified approximately 20% of the time
on the buy-side and approximately 60% on the sell-side. The remaining
80% of buy-side and 40% of sell-side agreements have indemnification of
25% of agreements of both buy-side and sell-side respondents provide no
means for dispute resolution. The survey describes the frequency of
dispute resolution methods.
reported that 7% of the buy-side transactions and 10% of the sell-side
transactions end with a dispute between the intermediary and the client.
three-quarters of both buy-side and sell-side fee disputes occur when the
client wants to pay less.
variety of disputes are not related to fee payments, and respondents
provided a list of dispute types.
Resolution in Practice
Negotiation is reported as the most used method of dispute
resolution for approximately 75% of both buy-side and sell-side
respondents. Lawsuits are pursued by 13% of the buy-side and 9% of the
rate of dispute resolution through lawsuits times the rate of client
disputes implies that 1% of both buy-side and sell-side transactions
end in lawsuits.
survey asked what kind of discount the advisory firm has accepted in
disputes in which it receives a lower fee than specified in the fee
agreement. The buy-side range and overall average
buy-side discount are reported, along with the sell-side range and the
overall average sell-side discount.
were asked for their observations on the reasons the responses are consistent. “Client bad faith” is cited as the most frequent
reason. A “situation not anticipated by the contract” was cited next on the
buy-side, followed by confusing/silent language and an honest
misunderstanding, plus a variety of other comments.
were also asked if the fee structures in practice today by intermediaries are
fair and reasonable, or too high or too low. Nearly 80% report that fee
structures are “fair and reasonable.”
Of most importance are the
lessons intermediaries say they have learned during the process.
Several dozen comments are included. Among the comments are:
“Be clear in the agreements;
use clear contractual language.”
confusing language; use explicit contracts.”
clear on the process.”
recouping of attorney's fees for collection.”
The advice suggested by
intermediary respondents on contract language, as well as their comments
and suggestions throughout the survey represent the best spirit of ACG’s
cooperation and information sharing. ACG members may contact ACG
headquarters, (800) 699-1331, for more information. Non-ACG members
may purchase the Intermediary Survey from Hypotenuse Enterprises for
$495. Net proceeds are shared with ACG.