What Does Tail Period Mean?
A tail period is the time period during which an investment banker working on a company's sale is entitled to payment, even after termination of services, if the deal closes within the period. It is a provision in the engagement letter and is found under clauses relating to termination of services.
Divestopedia Explains Tail Period
A firm, after deciding to go in for sale, engages an investment banker to draft an information memorandum, solicit interest from potential buyers, and negotiate a deal for which an engagement letter is issued. This document stipulates the terms and conditions relating to the investment banker's work, payment, termination, etc. If a deal is carried out by the firm within a specified time period (usually 12 to 24 months) after the termination of services of the investment banker, the banker is still entitled to fees related to that transaction, whether it relates to the efforts of the investment banker or not. The 12- to 24-month time period is called the tail period. This prevents potential unfairness to the bankers who expend time, effort and resources to identify potential buyers, even if they don't seal the final deal.
The scope of payment and time frame under tail period provisions depends on the firm and the banker. Some investment bankers prefer to cover the entire gamut of potential buyers who display an interest and then sign the confidentiality agreement or are provided with the confidential memorandum. Most firms, however, try to restrict tail period payouts to only those cases where the buyers have actually started negotiations for the sale. The actual amount and time frame depends on the bargaining capacities of the firm and the banker. Whatever is decided is recorded in a tail period clause in the engagement letter.