How Much Should I Pay to a Corporate Finance Shop?
Since most business owners are not working with corporate finance experts regularly, it's difficult for them to know what are "industry standard" fees.
The industry is not homogeneous and fees can vary widely depending on the mix of services provided. Companies like Relay Advisors often combine sophisticated consulting and business development services into their offerings thus making their pricing a hybrid of consulting and corporate finance pricing.
Pure investment banks' fees are often comprised of a monthly work fee, a cash sucess fee paid upon closing and equity type compensation. Depending upon the mix of debt and equity raised, or the selling price of a company, the fees usually add up to between 3% and 10% of the capital raised or the transaction value. For this fee, the banker typically writes an information memorandum describing the company, identifies and seeks investors or purchasers, evaluates and negotiates proposals or offers, and helps its clients close the transaction.
Monthly work fees or "retainers" vary widely. On one extreme, sole practitioners may charge no retainer thus working on a pure success fee basis, while at the other end of the spectrum, the bigger shops can charge $50,000 or more per month. Consider this carefully. When no monthly work fee is paid, company's often get what they paid for - nothing much. In some cases, the company seeking financing is just added to the broker's list of available deals or the financing is posted to an Internet based directory like BizBuySell - little active marketing is conducted and little value is added.
For the expensive shops, find out if the professionals working on your deal will be senior partners or junior associates. Some of the brand name shops charge high monthly work fees but assign juniors to perform most of the client's work. The junior is actually learning on the job! It's easy to check the CV, experience and credentials of the professional(s) assigned to your project.
For success fees, the fee is usually based on the type of financing or capital raised. Most bankers charge 1% to 3% for debt raises and between 5% to 10% for equity capital raised. This fee difference reflects the relative difficulty of borrowing money versus finding the right equity investors. In the case of company sales and depending upon the success fee rate, the percentage may be applied to the company's enterprise value (value of company debt plus equity) or just to the value of the shares sold, in the case of a share sale, or to the value of the assets sold, in the case of an asset sale.
In addition to cash fees, most investment banking fees include equity compensation which is usually paid in the form of warrants. Warrants are generally a number of shares equal to 5% to 10% of the number of shares issued at the time of financing. The warrants usually have an exercise price equal to 100% of the price of the securities sold in the deal.
Ultimately, investment banking fees should have a strong component based on the successful completion of the financing or company sale. The best advisors strive to deliver competing offers that permit a client to choose the best one for them.