Any thoughts on finders fees?

September 06, 2019

by a searcher from Indiana Wesleyan University in Peachtree City, GA, USA

Intermediary providing introduction to potential buyer. Otherwise, buyer is not represented and intermediary will not be involved in the transaction. Seller is represented. Small deal - microcap business, enterprise value likely in the $1.5 - 2M range. What's typical? Percentage (if so, what %?)? Lehman? Flat fee? Other? Payable as success fee? Other thoughts and opinions welcome.

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Reply by a searcher
from Westminster College of Salt Lake City in Salt Lake City, UT, USA

I'll point out the obvious so it has been mentioned, let's assume there's a regulatory exemption, I've seen fees on this size of deal range far & wide, from 1% to 10% & everything in between, including the Lehman Formula, paid at close to vested on the cap table, carried interest similar to a fundless sponsor, etc. In my opinion, it's is about negotiating & selling the value you are bringing to the table, helping the client to justify paying the fee, nothing else matters, really. I prefer the vested position because it keeps interests, risk & reward aligned. It also displays confidence in the deal & the upside can be exponentially greater down the road. Plus, then the perception of you changes to that of a partner & that's good for the next deal & the next. I don't like depleting cash that could otherwise extend the deal's runway. The justification for higher fees is that the commitment for the finder, whether it be a $1.5m deal or a $15m deal, isn't that much different & if there's nothing to be made on small deals they'll never get done & if they don't there can never be big deals. The big deals were also small at some point too.

Reply by an intermediary
from Pepperdine University in Los Angeles, CA, USA

This is standard practice for PE groups as proprietary deal flow is so valuable. Lehman is typical - with how far the 2% drags as the negotiated piece. Usually there is a minimum fee in there as well (negotiated). As stated above a total fee of 1%-3% seems typical.. Usually there is a clause that the fee is discounted heavily if the seller is represented AND has been shopped to multiple potential buyers (say more than 4 or so). The value in a buy-side broker/finder/adviser to PE is the proprietary deal flow.

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