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

One of the most frequently unasked questions, but one that everyone wants to understand, is what is a fair M&A advisory fee?

To be clear, for a firm that genuinely plays the role of a broker-dealer or investment bank, operating under the requisite legal framework, the answer falls into a fairly narrow band. 

Ignoring the costs of any required fund raising (see my post on fees for raising capital) the fees for advising the buyer or seller in the middle market arena, tend to follow the 5-4-3-2-1 "Lehman Formula."

The Lehman Formula provides that the advisors get 5% of the first million, 4% of the second, 3% of the third, 2% of the fourth and 1% of all the consideration above four million. 

In a political context, we talk about liberal and conservative, Democrat and Republican, Bush and Clinton.

In accounting, we talk about aggressive and conservative.  The traditional notion was that accounting entries that resulted in understating actual earnings were “conservative” and entries that led to overstating earnings were “aggressive.”  The question for entrepreneurs and executives might be, “which is best for maximizing the value of my business?”

The SEC and FASB (the folks who define Generally Accepted Accounting Principles or GAAP) view it as their primary objective to end this discussion in favor of being “simply right.”

Entrepreneurs and executives, often ask when, or in the alternative, why they might need a fairness opinion on a purchase or sale transaction.

The primary reason for the Board of Directors of a selling company to seek a fairness opinion is to establish, primarily for the benefit of minority shareholders who lack board representation or whose votes won't count (because of their relatively low shareholdings), that the transaction as contemplated is fair to all shareholders.

The Board is, as you might imagine, seeking to insulate itself from claims of those who may disagree with the decision.  There are a variety of legal maneuvers employed to manage this risk, including the use of an auction procedure to demonstrate that the highest or at least best bid has been received, reviewed, negotiated and ultimately accepted.  Good counsel will usually recommend a "belt and suspenders" approach, utilizing multiple means of protecting the board from rancorous shareholders.