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The ROI of Using an Experienced Investment Bank

By Generational Equity

ROI Experienced Investment Bank

As they say, the devil is in the details! And one of the details that we hear the most questions about is investment banking fees. As in, “Why do you charge an engagement fee at all? I have talked to Larry, a guy at my country club, who is a business broker and he says he doesn’t charge any engagement fees.”

Well folks that is quite common with local business brokers that most likely close 2-3 deals a year, usually very small ones. A one-person broker firm can survive quite nicely on an arrangement like that.

But do you want to use a local guy who advertises all his clients to the same 30-40 “buyers” he knows no matter what industry you are in? A fellow who doesn’t do any recasting of your financials and doesn’t create documentation like our exhaustive Confidential Information Memorandum, simply faxing a one-pager to the 30-40 folks he knows, hoping to get an answer?

No way! But to get Wall Street service you have to be willing to make an investment; an investment that gets you the best ROI for your company.

And really, you have to look at your company as an investment – not a job, not a hobby, not a checkbook, but something that you have invested in, grown, and nurtured. When it comes time to exit, you need the finest advice you can find.

Well folks, as they say in Bulgaria, you get what you pay for! And investment banking advice (especially good advice) will cost you.

Recently Firmex, Divestopedia, and Axial published their 2022-2023 M&A Fee Guide and the results affirmed what we already knew: Engagement fees are common among reputable M&A firms, and success fees are also found in most deals based on size. Here is what they revealed in their study:

In North America, 81% of the middle market advisors charge an engagement fee, also known as a retainer or work fee. The most common format is a single up-front retainer, used by 44% of the advisors. Monthly fees were used by 31% and hourly fees only by 4%.

According to Alfredo Garcia with Axial: A non-refundable fixed retainer fee is common across our sell-side members. It ensures the seller is serious about pursuing a transaction, and the sell-side advisor is compensated for their work to bring a company to market (preparing the CIM, teaser, model, buyer list, etc.), even if the seller ultimately decides to walk away from a bona fide deal. In addition, more than half of the advisors (56%) said they deduct the engagement fees paid from the success fee.

OK, so the survey shows that the vast majority of reputable, experienced middle market M&A firms will charge you a fee to access their services. And these services are exhaustive and include recasting your financials, making them buyer ready, creating a defendable 5-year pro forma, researching your industry and key end markets, determining your firm's value range, creating a buyer list, marketing to the buyer list, negotiations, more negotiations, updating your financials several times while all this is going on, working through due diligence and then, helping you cross the goal line and closing your deal.

How much is all that worth to you? Trust me, you really can’t value it until you go through it, as our clients tell us all the time:

So then we come to “Success Fees”, again very common in our industry (among reputable firms) as found by the Firmex/Divestopedia/Axial study:

Success fees, typically a percentage of the transaction value, continue to be the bulk of revenue for merger advisors. Only about one-third of advisors charge a flat-rate percentage for any deal size. The most common structure this year, used by 40% of the advisors, is what is known as the Lehman formula, where the percentage decreases for large deals. Another 18% use an accelerator formula, which increases the rate as the deal size increases.

OK so the great news is that Generational, like a majority of reputable firms as mentioned above, deducts the engagement fee from the final success fee, which is common as the study found:

More than half of the advisors (56%) said they deduct the engagement fees paid from the success fee.

So, as you can see, if you hire a reputable, experienced M&A firm like Generational you will have to pay for our services. BUT your ROI will most likely be much, much larger than if you engage a local business broker you met at your country club who tells you, “Heck I don’t know what your company is worth, let’s go find out!”

Fortunately there are multiple ways to engage with us since we have so many teams involved in consulting, wealth management, and exit planning among others. But most business owners start their journey with us at one of our Growth and Exit Planning Conferences. Here you can learn how effective exit planning works, and you can also meet with one of our professional team members and discuss your specific goals and dreams. Please use the following links to learn more:

Carl Doerksen is the Director of Corporate Development at Generational Equity.

© 2023 Generational Equity, LLC All Rights Reserved

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Terry D. Wickman, President, Keytroller
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Bil MacLeslie, CEO, ipHouse
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We were represented by Michael Goss with Generational. The due diligence was grueling and exhausting, but Michael propped us up and kept us motivated throughout the process. Debi and I continued to ask each other how we could possibly make it through this process without the assistance of Michael. Michael's professionalism and knowledge is absolutely amazing, and we are so blessed to have had him by our side as we made our future dreams come true.
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Caroline Connelly, CEO, OptoTest
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Bil MacLeslie, CEO, ipHouse
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Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
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Larry Moore, Owner, A Company Portable Restrooms
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Jay Dinnison, Owner of Sharpe Mixers
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Bil MacLeslie, CEO, ipHouse
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Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
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Shane and Johanna Kline, Owners of Vision Upfitters
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Eric Erlandson, Owner, Action Fastenings, Inc.
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Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I decided to attend the conference and hopefully receive some guidance on how to structure an exit plan of my business. Upon arriving at the conference, I was so impressed with the presentation given by Generational Equity that I set a future appointment that week to discuss the possibility of selling my business with their Senior Managing Director David Robinson.
JoAnn Ellis, Owner of Fondren 5 Star Kennels
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Ralph Noblin, President of Noblin & Associates
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Terry D. Wickman, President, Keytroller
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Salvo Stoch, Founder and CEO of Sleeping Partners
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Tom Currier, Former President & CEO, Rackmount Solutions
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Bryan D. Horn, Owner, Over Under Clothing
The professionals at Generational Equity then helped develop a roadmap for enhancing the value of the firm and an evaluation report. This was completed by June 14, 2021. We then developed the Confidential Information Memorandum and put Taylor Studios, Inc. on the market by July.
Generational Equity’s professional staff helped me every step of the way. Their network and professionals are the only reason I sold my company this quickly. For me this is a once in a lifetime sale and I was unfamiliar with the process. I was able to lean on them with questions and concerns.
Betty L. Brennan, President, Taylor Studios
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Robert Evans, President and CEO of Mealtracker Dietary Software
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Rick Greene of Dobbs Equity Partners LLC
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Robert Evans, President and CEO of Mealtracker Dietary Software
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JoAnn Ellis, Owner of Fondren 5 Star Kennels