Success fees - are they worth it and at what transaction value?

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January 17, 2024

by a searcher from The University of Michigan - Stephen M. Ross School of Business in Birmingham, MI, USA

I'm a self-funded searcher targeting businesses with $400K-$1M EBITDA, or roughly $1M-$4M transaction value. I've talked to M&A advisory firms that will share deals with me matching my criteria. At my size, they will be "passed" deals from their larger clients. For closed deals, there is a success fee on a Lehman scale, 5% on the first $1M, 4% on the next million and so on, with a $150k minimum. The first deal presented to me has a $2.6M price tag, which means it would trigger the minimum fee. At $3M transaction value this seems palatable, but at $2.6M or less it seems like a lot...
- Thoughts - is it worth paying these success fees if it helps to find more/better/quicker deals?
- Is there a threshold deal size you don't think the fee is worth it?
- Has anyone had luck financing these fees...is that even possible?

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commentor profile
Reply by a searcher
from Indiana University in Atlanta, GA, USA
If you work with any of them, I'd make sure that they're not providing any deals that are posted online for anyone to access. I've heard of some buy-side advisors that send deals that are listed on bizbuysell. That's not value-add, because you could find those yourself, but even worse, it then locks you in even if you did find that one yourself because they also sent it to you, so you're then on the hook for their finders fee if you go with that deal. If they're only going to send you deals that aren't available to the general public, then it's definitely worth it. After all, you only have to pay if you do a deal on one they sent you. Then you can factor that cost into your total deal cost to see if it's still worth it.
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Reply by a searcher
from Southwestern University in Houston, TX, USA
The answer to any fee is always, "does it pencil"? Don't get hung up on that it's too big a percentage or you hate fees or "that's highway robbery". It's just a cost of getting into business with that company. If it's $2.6MM and $1.5MM of profit (I know - a dream), who cares about the additional $150K?

Depending on the size of the firm, you could always negotiate a form of Lehman based on EBITDA, that way encouraging them to only present you the best of the deals they've passed on.
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