Investment bank fees: retainers, success fees and the real numbers

To sell a company worth €5m, expect to pay an investment bank around €250,000, or 5% of enterprise value, most of it on the day the deal closes. The figure comes from the only public fee grid we have found in France, published by Infocession, February 2022. Almost no adviser publishes its prices, so that is where we start. The grid is French and so are the orders of magnitude. Every amount in this article excludes VAT.

How does an investment bank get paid?

Investment bank or M&A boutique, the classic structure has two layers.

The retainer is a fixed fee, usually monthly, sometimes paid in one or two instalments. It is due whatever happens.

The success fee is a percentage of the deal amount. It is due only if the deal signs, and it is paid at closing.

Why a retainer?

A mandate means months of work before the first euro of success fee: valuation, information memorandum, counterparty list, approaches, follow-ups. With us, a sale process takes 6 to 10 months. The retainer covers part of that cost and commits both sides. An owner who pays every month sends the numbers on time and does not launch a process “just to see”. A bank paid every month has to report every month.

Our view: be wary of 100% success-only on a company sale. An adviser working for free has to stack up mandates to survive, and will spend its time on the ones that sell themselves.

Why a success fee?

It aligns interests: your adviser earns a living if you sign, and earns more if you sell for more. That alignment has a limit. At a 6% fee, an extra €500,000 on the price brings €30,000 to the bank and €470,000 to the seller. For the adviser, signing fast at a decent price can be worth as much as fighting for three more months. Incentive tiers, covered below, are there to correct that.

How much does an investment bank cost by deal size?

The Infocession grid, in an article updated on 16 February 2022, gives the average fees charged by investment banks in France, as a percentage of enterprise value.

Source: Infocession, February 2022 (in French). 2022 averages for the French market.

According to the same source, the fixed part is most often 10 to 20% of the total paid (Infocession, February 2022).

Between €2m and €50m, the percentage is divided by five and the bill multiplied by five. The reason: the work depends little on size. Selling a €3m company or a €30m one takes the same memorandum, the same buyer list and the same months of negotiation.

These are 2022 averages and there is no official scale: every mandate is negotiated, depending on how hard the file is, the sector and the share of fixed fees.

Does the Lehman formula still apply?

The Lehman formula is attributed to Lehman Brothers, which used it some fifty years ago. It sets a sliding fee by tranche:

• 5% of the first million;
• 4% of the second;
• 3% of the third;
• 2% of the fourth;
• 1% of everything above.

It no longer applies as written to small deals, because its tranches were never adjusted. A million back then weighed far more than a million today. On a €2m sale, the formula gives 50,000 + 40,000 = €90,000, when the average reported by Infocession is €150,000.

So practitioners use variants: the double Lehman (the same tranches with doubled rates: 10, 8, 6, 4 then 2%), tranches widened to several million each, or a tailored sliding rate that drops above a given price.

Lehman columns: our own calculations from the formula. Average: Infocession, February 2022.

The French average sits between the two formulas at every size. So a plain Lehman on €5m is cheap, and a double Lehman on €50m is expensive.

What should you negotiate besides the rate?

A 5% mandate can cost more than a 6% one. It all depends on what the rate applies to. Seven points to read before you sign.

• The calculation base. Enterprise value (net debt included) or equity price? Same question for earn-outs and vendor loans: are they in the base, and is the fee due at closing or when you are paid?
• The minimum fee. A floor due whatever the final price. It protects the bank if the price drops along the way. Check that it still makes sense at the bottom of your valuation range.
• The retainer, deductible or not. Depending on the mandate, it is credited against the success fee, in full or in part, or it comes on top.
• The tail period. If you sign after the mandate ends with a counterparty approached during the mandate, the fee is still due, often for 12 to 24 months. That is fair, provided the clause refers to a written list of the counterparties actually contacted.
• Exclusivity. A sell-side mandate is almost always exclusive, and with good reason: two advisers calling the same buyers damage the file. Negotiate the duration, the exit terms and what happens with buyers you already knew before the mandate.
• Rebilled expenses. Travel, data room, databases. Ask for a cap and for prior approval above a set amount.
• Incentive tiers. A higher rate on the part of the price above a target. Above the target, every euro gained really counts for your adviser.

The target price starts from a valuation you can defend: we cover the methods in our article on valuation.

What does that come to on an €8m sale?

A made-up example, with round numbers that are no firm's price list, ours included. A company sells for €8m of enterprise value. On deals of this kind we mostly see success fees of 5% to 7%: we have used 6%. The mandate provides for:

• a retainer of €5,000 a month for 8 months, so €40,000, not deducted from the success fee;
• a success fee of 6% of enterprise value, so €480,000.

Total: €520,000, or 6.5% of enterprise value, of which 8% is fixed.

Now change one clause at a time.

• Deductible retainer. The €40,000 is credited against the success fee. Total: €480,000, of which €440,000 at closing.
• Equity price as the base. With €2m of net debt, the fee falls to 6% of €6m, so €360,000. Total: €400,000.
• Minimum fee of €450,000. No effect at €8m. But if the final price slips to €6m, 6% is only €360,000 and the floor applies: you pay €450,000, or 7.5% of the actual price. Total: €490,000.
• Incentive tier. 6% up to €8m, 10% above. If the company sells for €9.5m, the fee becomes 480,000 + 150,000 = €630,000. Total: €670,000. Without the tier you would have paid €60,000 less, but on €1.5m of extra price.

In all four scenarios the headline rate is still 6%. The total bill runs from €400,000 to €670,000.

Are fees the same for a fundraising?

No. On a fundraising, the fee is calculated on the amount raised. A company valued at €12m that raises €3m pays on €3m.

The work, though, looks a lot like a sale: a file, 30 to 60 counterparties to approach, months of negotiation (6 to 9 months with us). The base is smaller, so the percentage is generally higher.

Three points specific to fundraising:

• the rate is often lower on debt and non-dilutive financing than on equity;
• existing shareholders, or investors already in talks with you, can be left out of the base or charged at a reduced rate;
• some advisers ask for part of their fee in warrants. That dilutes you: count it in the cost.

We have found no reliable public grid for fundraising fees in France, and we would rather not invent one. Compare offers on total cost as a share of the amount raised.

Investment bank, fundraising adviser, fixed fee or platform: which one?

• Investment bank or M&A boutique. It runs the process from start to finish: valuation, documents, approach to counterparties, competitive tension, negotiation through to closing. Retainer plus success fee.
• Fundraising adviser. An adviser, often independent, focused on fundraising, usually on smaller rounds. Paid mostly on success.
• Fixed-fee adviser. An accountant or a consultant who bills a valuation, a presentation file or negotiation support, at a fixed fee or by time spent. You pay for the work, whatever the outcome.
• Platform. Business-for-sale listings or introductions to investors, by subscription or for a small commission. You run the process yourself.

At what deal size does an investment bank make sense? A full process has a roughly fixed cost, hence the minimum fees. At €2m, the Infocession average is already 7.5%. A minimum fee of €100,000 (a made-up figure) on a €1m sale is 10% of the price. Below about €2m, a fixed fee, your accountant or a platform is often the more rational choice.

Above that, you are buying competition: a lone buyer sets the price, several offers push it up. A good part of the price is also decided before the mandate: see how to prepare a sale.

How does Prouesse charge?

A low monthly retainer and a success fee. Most of what we earn therefore depends on closing. We work on deals from €2m, with no upper limit, in M&A and in fundraising.

We take on 5 to 7 deals a year. On each mandate we approach 30 to 60 qualified counterparties, about half reply, and nothing goes out without your approval.

We do not publish a price list: it depends on the deal and is discussed mandate by mandate. One point we do not cover here: the tax treatment of fees. Take it up with your accountant before you sign.

Frequently asked questions

How much does an investment bank cost for a €5m deal?

Around €250,000 excluding VAT, or 5% of enterprise value, according to the average grid published for the French market by Infocession in February 2022. The fixed part is most often 10 to 20% of that total, and the rest is paid at closing. It is an average: the calculation base and the minimum fee can move the bill by tens of thousands of euros.

Is the retainer deducted from the success fee?

It depends on the mandate: both practices exist. In some mandates the retainer is credited against the success fee, in full or in part. In others it comes on top. Read the exact sentence before you sign, and compare offers on total cost in the event of success, retainer included, instead of on the headline rate.

Can you negotiate investment bank fees?

Yes, every mandate is negotiated. The rate is rarely the best place to push: the calculation base, the minimum fee, whether the retainer is deducted and the length of the tail period move the bill more. Ask for an incentive tier above a target price before asking for a lower rate.

What happens if the deal does not go through?

You pay no success fee: it is due only at closing. Retainers already paid and expenses already incurred stay with your adviser. Watch the tail period: if you sign within 12 to 24 months of the end of the mandate with a counterparty approached during the mandate, the success fee becomes due again.

Will an investment bank take a mandate below €2m?

Rarely. A full process has a roughly fixed cost, and a minimum fee weighs too heavily on a small price: €100,000 on a €1m sale is 10%. Below €2m, a fixed-fee adviser, your accountant or a platform is often a better fit. At Prouesse, we work on deals from €2m.

Adrien PannetierFounder of Prouesse. 15 years in private equity and impact investing, formerly at Caisse des Dépôts.