Middle Market Deals and how to buy, sell and raise capital from $5 to $500 million

The most common question I think prospective clients have of investment bankers--and rarely ask--is what does it cost? 

It is remarkable that investment banking fees for raising capital, when calculated as a percentage of the equity capital raised, are fairly flat even as scale increases.  For instance, a $5 million private placement of venture capital or private equity is likely to cost about six percent, plus or minus a point or two.  At the same time, a $500 million public offering is likely to be subject to approximately the same fee, that is, about six percent, plus or minus a point or two.

In addition to the banker's fees, expect legal costs to fall in the range of one-half to one percent of the capital raise--no matter how big the transaction gets.  Other diligence costs, including the investor's costs, should also fall in that range.  In addition, the investor may asses a point or two (or three) at closing.

Other costs that may be associated with a capital raise include audit costs and valuation services, including, in some cases, a fairness opinion.  These numbers can range from zero to one percent (or even more) of a deal price.

The investment banking fees are typically structured as mostly paid in cash, with some equity participation (usually warrants) sometimes used to reduce the cash portion of the fee.  In mid market transactions, it is common for investment bankers to charge either an up front retainer (typically $20,000 to $50,000 or more) or a monthly retainer (typically $5,000 or more per month).  Retainers are customarily credited against the success fee.

So, the total cost of a capital raise can easily reach ten percent--that can be enough pennies to matter!   When you launch an effort to raise capital, you have to raise enough to achieve your objectives and cover the costs of raising the capital.

The good news is that 90% of the costs are typically paid after there is a high probability of closing, and most of that isn't paid until closing--meaning that you use the investor's money to pay these costs.

There is more to come on deal fees for M&A advisory services and debt placements.