Mergers and acquisitions (M&A) are high-stakes transactions where every detail matters—including the fees paid to investment banks. However, a significant issue lies beneath the surface of these negotiations: the way M&A fees are typically benchmarked. Typical fee benchmarks can overstate market rates by ~20% as they rely on a single total fee number which is not applicable for most engagements. Understanding the nuances of M&A fee structures is crucial for ensuring fair and accurate benchmarks.
In M&A transactions, fee proposals commonly present a "gross fee," encompassing a range of components, including fairness opinion fees, discretionary fees, and other components. This method of reporting, while standard, can create a distorted view of market rates.
For example, fairness opinion fees—charged for independent assessments of a deal’s fairness to shareholders—can significantly inflate the total reported fee. These fees, often running into six or seven figures, are included in gross fee benchmarks even when they are unnecessary for many transactions, particularly private company exits. This practice skews the data and creates unrealistic expectations about what a typical M&A transaction should cost.
In reality, not every deal requires fairness opinions or discretionary fees, especially in the private market sales. Yet, databases that aggregate and report M&A fees often fail to account for these distinctions, presenting an inflated picture of industry norms.
For example, KnowBe4 paid Morgan Stanley $51m for advising the company on its sale to Vista Equity Partners. Of the total $51m, $10m was paid for the fairness opinion. This difference has a meaningful impact on fee percentages. The gross fee is ~1.11% of the deal's value while the core fee (excl. fairness opinion) is ~0.89%. A >20 basis point delta can have a significant impact on the understanding of "market" rates for fee analyses, especially when analyzing hundreds of comparable investment banking engagements.
Private company sales are a different landscape entirely. Unlike public company transactions, most private deals do not require fairness opinions. As a result, using gross fees that often include fairness opinion fees is inherently flawed.
For instance, a business owner selling a private company might base their fee expectations on benchmarks from transactions that included fairness opinion fees, even though these fees are irrelevant in their context. This discrepancy inflates perceived costs, leading to unnecessary concessions during negotiations or a misallocation of resources.
The real cost implications are significant. By understanding and excluding unnecessary fee components, private sellers can avoid overpaying and ensure their fee arrangements reflect the true scope of the services provided.
To establish accurate benchmarks, it’s essential to compare fees on a like-for-like basis. This involves stripping out non-comparable components, such as fairness opinion and discretionary fees, from gross fee figures.
Platforms like FeeLogic are instrumental in achieving this level of granularity. Unlike traditional databases, FeeLogic provides detailed breakdowns of fee components, enabling users to isolate core transaction fees. This methodology allows for the creation of accurate, comparable benchmarks that reflect the true cost of M&A services.
For example, a ~20 basis point overstatement (from the KnowBe4 example above) for a $250m exit can result in excess fees of $500k. By separating these components, stakeholders can negotiate based on appropriate fees for their potential engagement, ensuring a fairer outcome.
Armed with a clearer understanding of fee structures, companies can take actionable steps to optimize their negotiations and analyses. Private company transactions can be analyzed without fairness opinion fees or other fee components, providing more realistic benchmarks for sellers. This approach reduces unnecessary costs and aligns fee structures with the actual value delivered by the advisory team.
To avoid the pitfalls of inflated benchmarks, companies should adopt a more informed approach to evaluating fee proposals. Here are some best practices:
By taking these steps, companies can protect their interests, streamline their costs, and negotiate from a position of strength.
Gross fee comparisons are a misleading benchmark in the M&A industry, inflating fee proposals and distorting the true cost of services. By understanding the components of M&A fees and using tools like FeeLogic to strip out unnecessary fees, companies can gain clarity and negotiate more effectively. For private sellers in particular, this approach ensures fairness and accuracy, aligning fee expectations with the unique requirements of their transactions.
