Excerpts from:
Survey Results: The Intermediary’s Fee: Structuring and Collecting

One of the strengths of the Association for Corporate Growth (ACG) is its networking capability, and the sharing of information. Over the years ACG has surveyed its members for many purposes — for general customer service, for individual sector interests, and for evaluation of specific programs and events.

Recently, Hypotenuse Enterprises, Inc. completed, in conjunction with ACG, a survey of yet another type — business practice among ACG’s 710 intermediary members. The reason for such a survey is that by understanding our common practice, our member intermediary firms might become more knowledgeable and effective. The purpose of the survey is strictly information sharing.

There are no conclusions on best practices, and no recommendations, implied or explicit. There is simply the reporting of “the way it is,” according to the intermediaries who are survey respondents.

While the results reported are statistically significant for the survey respondents, there is no way to assure that those who chose to respond are a representative sampling of the 710 intermediary members of ACG. There is always the possibility that those who charge higher or lower fees, do more or fewer deals, or have or do not have fee collection problems were more or less likely to respond to the survey. Additionally, there is no way to assure there are not multiple responses from the same firm, as many intermediary firms have multiple members in ACG. Nevertheless, the survey results do present interesting information that ACG has not previously collected.

RESPONDENTS

From the 71 0 members to whom the Intermediary Practices Survey was mailed, 126 responses were received, a response rate of 17.7%.

Size of Firms

Respondents are characterized by the size of their firms, based on the number of professionals engaged in intermediary activity. Possible responses were divided into four categories: “1-5”, ‘6-10” “11-25”, and “greater than 25” professionals. See Chart A.

 
Chart A

Nearly 90% of the respondents are in firms with 25 or fewer intermediary professionals, and more than half of the respondents are in firms with five or fewer professionals.

Number of Deals

Another method of characterizing the responding firms is by the number of deals completed in the past five years. The results show approximately 60% of the responding firms completed fewer than 50 transactions over the past five years.

We separated these data by firm size, illustrating that larger firms do more deals.

Deal Value

The respondents are also characterized by the size of transactions they complete. Looking at the entire population of respondents over the past five years, the average transaction size is reported as $15.3 million. The average transaction size for those firms with more than 10 professionals is 60% higher than those firms with ten or fewer professionals.

Services

Of the survey respondents, approximately 13% perform sell-side only services, while only 3% are solely buy-side. Buy-side and sell-side intermediaries comprise the remaining 84% of respondents. Thus, in discussion of responses by “sell-side respondents,” 97% of the survey respondents are represented, and “buy-side respondents” represent 87% of the survey respondents.

Of the transactions completed by respondents in the past five years, nearly 70% were sell-side and 30% buy-side. Intuitively, one might expect an approximately equal split, given that there are two sides to every negotiating table. The fact that the respondents have more than twice as many deals on the sell-side as the buy-side may indicate that the intermediary population surveyed is less likely to be retained on the buy-side, that buyers are likely representing themselves, or that there is a bias in the survey results toward sell-side representation.

·        Buy-side Transaction Services

A set of possible buy-side services was provided for the respondents from which they could select services to characterize their business activities. The most frequent responses in decreasing order are deal structuring, negotiating, introductions, valuation, analysis, financing, market sector evaluation, and management advisement, all being mentioned by more than 70% of buy-side respondents. Less frequent mentions, less than 30%, are opinion letters and post-deal integration plans.

·        Sell-side Transaction Services

The most frequent mentions of sell-side services in decreasing order are deal structuring and negotiating, receiving and evaluating offers, qualifying buyers financially, contract review, market sector evaluation, presentation of a “value added” buyer, valuation estimates, management advisement, extensive marketing to buyers, and handling due diligence. All the foregoing mentions were mentioned by more than 70% of sell-side respondents. Only 30% of respondents mentioned opinion letters.

·        Other Services

Most frequently mentioned transactions, other than acquisitions and divestitures, include joint ventures, strategic alliances and licensing. Among the least mentioned transaction types are R&D partnerships.

Services mentioned by more than 50% of the respondents include financing, strategic planning, consulting on corporate development, and venture capital. Services that are mentioned by less than 20% of the respondents include portfolio management and post-deal integration.

"Other" responsibilities mentioned include "advising," "mailings," "financing strategy," "research and documentation," "management presentations," and "memorandum and presentation materials.

COMPENSATION

Contingency Fees

Transaction compensation principally falls into two categories: retainer and success (contingency) fees. With respect to success fees, straight Lehman Formula and Modified Lehman are the most frequent mentions for both the buy-side and sell-side, and are summarized in the survey report.

Minimum Success Fees

The average minimum success fee on the buy-side is $140,200 and on the sell-side is $150,700.

Sell-side respondents’ minimum fee is 7.5% higher than the buy-side respondents’ minimum success fee. Only 12.7% of buy-side advisors sometimes reduce fees for reduced services, but no such alternative fee adjustments are reported by sell-side advisors.

Retainers

On the sell-side, no respondents report working on retainer only, but 10% report working on a success fee only basis. The remaining 90% receive a retainer plus a success fee. Sell-side retainers range from a low of $1,500 to a high of $150,000 per month.  When the monthly average retainer is multiplied by the number of months paid, the average retainer is slightly over $60,000.

Nearly 80% of the respondents report crediting back all or part of the retainer against a success fee and, while the range of credit is from 5% -100% of the retainer amount, the average credit back is slightly more than 90% of the retainer paid, with many respondents reporting 100% credit of the retainer against the success fee.

Consulting Fees

The survey also asked about consulting fees. Consulting fees range from a low of $60 per hour to a high of $2000 per hour. The average consulting fee is reported to be $224 per hour.

A retainer range for consulting is reported from a low of $500 per month to a high of $1 million per quarter for defense work. The average consulting retainer is detailed in the survey, as are the one-time up-front consulting retainers.

TRANSACTION AGREEMENT TERMS

The survey also focuses on the key terms of engagement agreements. The average period of a sell-side agreement is 11 .2 months, slightly less than the buy-side agreement term of 13.0 months, with a wide range.

The "tail" of the agreement is defined as the period after which the term expires but a fee would still be paid to the intermediary if a transaction were completed. Approximately 90% of respondents report that their agreements contain a tail. Both the buy-side and sell-side tails are detailed in the survey.

Exclusivity

The survey also inquires about exclusivity of buy-side and sell-side assignments. Exclusivity is more common in a sell-side engagement, with 93% reporting exclusive agreements. 

Fee Calculation

Most fees are paid based on a definition of the purchase price, and certain adjustments to the purchase price. When liabilities assumed by the buyer are added to the purchase price items as bank or other interest bearing debt, pension liabilities, installment notes, contingency payments and trade payables are mentioned by some respondents as being included in the purchase price for fee calculations. However, fewer respondents report subtracting cash and/or marketable securities from the purchase price to arrive at the transaction value used for fee calculations.

Delayed Fees

As for payment terms, virtually all respondents say their agreements specify payment at closing, and most respondents do receive payment at closing. When part of the purchase price is contingent or delayed, approximately 75% of the intermediaries make a provision to collect a fee on deferred transaction amount.   The survey details how deferred payments are calculated.

Indemnification

The survey asked about indemnification by or of the intermediary. Of the 80% that have some indemnification, the client is indemnified approximately 20% of the time on the buy-side and approximately 60% on the sell-side. The remaining 80% of buy-side and 40% of sell-side agreements have indemnification of the intermediary. 

Dispute Resolution Methods

Approximately 25% of agreements of both buy-side and sell-side respondents provide no means for dispute resolution.  The survey describes the frequency of dispute resolution methods.

DISPUTES

It was reported that 7% of the buy-side transactions and 10% of the sell-side transactions end with a dispute between the intermediary and the client.  Approximately three-quarters of both buy-side and sell-side fee disputes occur when the client wants to pay less. 

A variety of disputes are not related to fee payments, and respondents provided a list of dispute types. 

Dispute Resolution in Practice

Negotiation is reported as the most used method of dispute resolution for approximately 75% of both buy-side and sell-side respondents. Lawsuits are pursued by 13% of the buy-side and 9% of the sell-side respondents.

The rate of dispute resolution through lawsuits times the rate of client disputes implies that 1% of both buy-side and sell-side transactions end in lawsuits.

Results of Dispute

The survey asked what kind of discount the advisory firm has accepted in disputes in which it receives a lower fee than specified in the fee agreement. The buy-side range and overall average buy-side discount are reported, along with the sell-side range and the overall average sell-side discount. 

Reasons for Disputes

Respondents were asked for their observations on the reasons the responses are consistent. “Client bad faith” is cited as the most frequent reason.  A “situation not anticipated by the contract” was cited next on the buy-side, followed by confusing/silent language and an honest misunderstanding, plus a variety of other comments.

Fairness of Fees

Respondents were also asked if the fee structures in practice today by intermediaries are fair and reasonable, or too high or too low. Nearly 80% report that fee structures are “fair and reasonable.” 

Lessons Learned

Of most importance are the lessons intermediaries say they have learned during the process.  Several dozen comments are included.  Among the comments are:

·        “Be clear in the agreements; use clear contractual language.”

·         “Remove confusing language; use explicit contracts.”

·         “Be clear on the process.”

·         “Cover recouping of attorney's fees for collection.”

Conclusions