Success Fee

Definition - What does Success Fee mean?

A success fee is a compensation structure paid to an investment bank for successfully closing a transaction. The success fee is usually calculated as a percentage of the company's enterprise value, and is contingent on the completion of the deal. While the success fee may appear to be high, the fact that it is contingent on closing the deal aligns the investment banker with the seller's interest.

The investment bankers take on some risk given that they don't get paid if the deal doesn't close. The fee itself should be a fraction of the increased purchase price that a top-notch investment banker should be able to get from prospective buyers.

Divestopedia explains Success Fee

The primary purpose of a success fee is to align the interest of the investment banker and the business owner selling their company. Success fees motivate the investment banker to sell the business at the highest price possible, although sometimes this may not be the case.

In a scenario where there is a flat success fee percentage, the investment banker may try to close a deal quickly to collect the success fee without seeking the highest price or the best purchaser. To avoid this misalignment of interests, the seller should structure a compensation mechanism that pays a higher success fee percentage if different purchase price thresholds are reached.

For example, if the seller receives an offer that meets the minimum value expectation, the investment banker would get a modest success fee of 2 to 3%. However, if a much higher offer is received, the investment banker could receive an additional 7% on the difference between your minimum value expectation and the premium offer. It's tough to know exactly what "reasonable" success fees should be as they varies by industry and region. The most important point for any seller is that success fees are negotiable.

Here are some rules of thumb ranges based on a company's enterprise value:

  • Less than $1 million: 8%;
  • Between $1 - 5 million: 6 - 8%;
  • Between $5 - 10 million: 4 - 6%;
  • Between $10 - 25 million: 4 - 5%;
  • Between $25 - 50 million: 2.5 - 4%;
  • Between $50 - 100 million: 2 - 3%;
  • Between $100 - 250 million: 1.5 - 2.5%;
  • Between $250 - 500 million: 1 - 2%;
  • Above $500 million: 0.50% - 1.5%

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