How do buy-side M&A adviser fees work?

Few advisers publish their fees, and proposals are structured differently, which makes them hard to compare. This guide explains the fee models you are likely to meet, what to check in each, and how to compare proposals on a like-for-like basis.

What this guide is, and isn't

This is an explanation of how buy-side adviser fees work: the adviser acting for you, the buyer, rather than for the seller. It is not an Acquisitiv price list and it does not set out what any particular fee should be. We agree our own fees in writing before any work starts, once we understand what you want to buy.

The main fee models

Most buy-side proposals use one model, or combine two or three.

Fixed project fee. One agreed fee for a defined piece of work, such as building a list of businesses that fit your criteria and approaching their owners. You know the cost in advance. The question is what exactly is included and what happens if the work runs on.

Retainer. A regular fee, usually monthly, for the adviser's time while the work runs. It suits ongoing work such as running a search and a pipeline of conversations over many months. The questions are what you get for it each month and how it ends.

Completion-linked (success) fee. A fee paid only if a deal completes, usually calculated as a percentage of the deal value, a fixed sum, or a sliding scale. One well-known sliding scale is the Lehman scale: 5% of the first million, 4% of the second, 3% of the third, 2% of the fourth and 1% above that. A "double Lehman" doubles each rate (Wikipedia). The scale was set in dollars, so check which currency a proposal uses.

Other terms you may see: - A minimum fee, which sets a floor under the success fee. - An abort or break fee, payable if you stop a deal after a certain point, to cover work done. - Expenses, such as travel or online data room costs, charged on top.

None of these is right or wrong in itself. Each moves risk and incentive in a different direction, which is why the detail matters more than the label.

What to examine in any proposal

Treat each of these as a question to ask, and get the answer in writing.

The fee base. If there is a percentage, what is it a percentage of? The headline price, the enterprise value (the price including any debt taken on), or something else?

The payment trigger. What exactly makes the fee payable: signing, completion or something earlier? Which acquisitions count? Only businesses the adviser introduced or worked on, or any acquisition you make during the engagement? For how long after the engagement ends?

Deferred payments. If part of the price is paid later, for example as an earn-out (paying part of the price later if the business delivers), is the adviser's fee calculated on that part too? If so, is it paid when you pay the seller, or up front on amounts you may never pay?

Credits. Are fixed fees or retainers deducted from any completion fee, or paid on top?

Specialist exclusions. Financial, tax and legal due diligence is almost always done by separate accountants and lawyers, under their own engagement letters. Ask the adviser what they will coordinate and what you will need to appoint and pay for separately.

Taxes and expenses. UK adviser fees are normally subject to VAT at the standard rate of 20% (GOV.UK). Getting it back is not automatic: HMRC's guidance is that a holding company generally needs to be carrying on an economic activity, such as providing real management services to its subsidiaries for a proper charge, to recover VAT on acquisition costs (HMRC VIT40600). Ask your tax adviser before you sign. Separately, buying shares usually carries stamp duty of 0.5% of the price on transactions over £1,000 (GOV.UK).

Ending the engagement. How can either side end it, with what notice, and what is payable if you do?

How to compare proposals side by side

Proposals rarely line up neatly. Put each one into the same simple grid before you compare the numbers.

The last row is the useful one. Work out, for each proposal, what you would pay if the search finds nothing you want to buy, and what you would pay if you complete one deal at the price you expect. That shows how each proposal shares risk with you.

To see how a scale works, here is an illustrative, fictional calculation. On a £6m deal using the classic Lehman scale in pounds: 5% of the first £1m (£50,000), 4% of the second (£40,000), 3% of the third (£30,000), 2% of the fourth (£20,000) and 1% of the last £2m (£20,000). That totals £160,000, or about 2.7% of the price. It is an example of the arithmetic only, not a typical or recommended fee.

What published surveys show, and why to be careful

There is no published survey of UK buy-side fees alone. The most detailed recent source is a European survey, and it comes with two important limits, which are set out here beside the figures rather than further down:

Caution: the figures below are from European advisers (199 responses from 22 countries, surveyed in December 2023), and the survey's fee questions were asked about sell-side engagements, from a respondent group that includes firms doing buy-side, sell-side or both. They are not UK buy-side figures. Use them as background, not as a benchmark for what you should pay.

With that caution, the Firmex European M&A Fee Guide 2023-24 reported (Firmex):

• the most common monthly retainer was between €5,000 and €10,000;
• the average success fee ranged from 4.7% for a €5 million transaction down to 1.7% for a €150 million deal;
• 76% of advisers charged a minimum success fee;
• 35% charged break fees;
• 51% credited engagement fees towards the success fee.

The pattern is more useful than the numbers: success fees as a percentage tend to fall as deals get bigger, and minimum fees are common, which matters most on smaller deals.

Value and incentives

A fee is worth paying if the work changes the outcome: finding a better-fit business than you would have found alone, avoiding overpaying, catching problems before completion, or saving your senior team time they cannot spare. See what a buy-side M&A adviser does for what that work involves.

Every fee model creates incentives, and it is reasonable to talk about them openly:

• A fee paid only on completion rewards completion, which can sit awkwardly at the moment you are deciding whether to walk away.
• A fee calculated as a percentage of the price rises if the price rises.
• A fixed or monthly fee is paid whether or not a deal happens, so you need clear deliverables and an end point.

None of this makes any model wrong. It means you should ask each adviser how their fee works when the right answer is to stop, and listen to how they answer.

Appointment checklist

Before you sign an engagement letter, make sure you can answer these:

• Who are they acting for? (It should be you, and only you, on this deal.)
• What exactly will they do, and what will you have by when?
• Who will do the work, and how much of it will the person you met do?
• How is each fee calculated, what triggers it, and on which acquisitions?
• How are deferred and conditional payments treated?
• What is excluded, and what will you need to pay others for?
• How are VAT and expenses handled?
• How does the engagement end, and what is payable if it does?
• How would they handle a conflict, for example if they also act for sellers in your sector?

Then compare proposals using the grid above, not the headline percentage. You may also find our guide to the difference between a buy-side adviser and a business broker useful.

Talk through the scope first

The right fee depends on the scope, and the right scope depends on what you want to buy and how much of the work your own team can carry. An Expansion Briefing is a free 30-minute call with us about what you want to buy and whether acquisition makes sense now, followed by a short written summary and a recommended next step.