#319: The Ultimate Guide to Investment Banker and Business Broker M&A Fees with Peter Lehrman

Ep.#5 [THEME FIVE]

What is a fair price to pay if you want to hire an investment banker/broker to sell your company? What value and services should you expect in return for the price you pay?

In the middle and lower private markets, these questions have traditionally been very opaque. Typically, entrepreneurs have to find answers to these questions by meeting with multiple advisors, talking to their network, and discussing the topic in their peer groups.

Today on the show, Peter Lehrman, the Founder of Axial, the M&A and capital raising platform for the middle market, is back on to help us shine light into this cloudy area of the M&A market by reviewing the results of the Axial’s 2021/22 M&A Fee Guide.

Axial and Firmex just released the results of an online survey that was completed by 269 middle market professionals from July through September 2021. Three-quarters of them work as investment bankers or merger advisors, and another ten percent call themselves business brokers. Many of them are leaders at their firms.

You might be asking, why is this important?

If you are like many business owners, when you think of hiring a banker/broker, you think of the direct cost that will be taken out of the transaction. However, this hire is almost essential. Doing all the paperwork and organization while selling a company is not just a night and weekend job. If done correctly, an intermediary can provide invaluable advice, experience, and resources to the sale process of a company. They should pay for their fees and more. On today’s show, Ryan and Peter Lehrman not only review the survey’s results, they talk about how to find, negotiate, and engage with an investment banker or broker.

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What You Will Learn

Key insights on M&A advisory fees in the middle market.
The different types of M&A advisors and how to understand the differences.
The variety of ways M&A advisors structure their fees and engagements.
Why it’s important to understand the number of companies a firm typically sells a year.
What a firm’s deal flow, the number of active engagements, and the size of the firm mean to you.
The different ways upfront fees work and what you should expect from the engagement.
How the transaction fee is determined, the range of percentages advisors charge, and what may or may not be negotiable.
Why extremely high upfront fees can be a huge red flag and what to do about it.
What the negotiables are when looking to hire an M&A advisor.
What a break-up fee is and how it works within a deal for the advisor and the seller.
How to think about advisor exclusivity and what terms are and are not reasonable to accept.

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Bio:

Peter is CEO of Axial and responsible for driving the company’s vision to be the trusted platform where private companies connect with capital. Prior to Axial, Peter worked in private equity at SFW Capital Partners and was part of the founding team at Gerson Lehrman Group, where he helped build the company’s dominant global technology platform for on-demand business expertise. He earned his undergraduate degree from the University of Virginia and received his MBA from Stanford Business School.

Interview Quotes:

06:30 - “So the reason to do the survey is to just put some lines in the sand around M&A advisors (who sell small and medium sized businesses) how they charge their fees.” - Peter Lehrman

11:56 - “Good intermediaries who do good work, who prepare their clients well, who take on assignments carefully are students of the trade.” - Peter Lehrman

12:22 - “Business owners who DIY it, don’t realize that selling a business is somewhat of a full-time job.” - Peter Lehrman

12:32 - “If your day job is running your company and you sign up for a whole other job of selling your company, that you’ve never done before, you just get stuck.” - Peter Lehrman

23:25 - “The right pricing structure for a small to mid-sized business is almost always a two-part pricing model where there is a certain fee which is charged (sometimes referred to as a work fee) that takes the form of a retainer.” - Peter Lehrman

27:31 - “What is the advisor going to do for you prior to engaging with the market of buyers? And what is the condition of the status quo of your business?” - Peter Lehrman

37:39 - “If you’re running a small business and the business is selling for 2, 3, or 4 million dollars, you are going to see certain brokers try to charge you 10% of the proceeds.” - Peter Lehrman

38:14 - “If you’re charging much more than 3%, 4%, or 5% of a 40, 50, or 60 million dollar deal, I don’t think that there’s a particularly good reason for you to pay much more than that.” - Peter Lehrman

38:22 - “The smaller the business, typically, the less tolerance there is, by the business-owner, to pay an upfront retainer.” - Peter Lehrman

44:50 - “You can essentially make the payouts to the advisor structured in a way where they’re getting paid in the same way that you’re getting paid.” - Peter Lehrman