Definition - What does Retainer Fees mean?
Investment banks often require a non-refundable retainer fee, sometimes called an upfront fee, work fee, or an engagement fee. For transactions larger than $100 million, retainer fees can be in the hundreds of thousands of dollars. For transactions below $100 million, these fees may range between $50,000 and $150,000. Retainer fees exist mainly to ensure that the selling firm is committed to the sales process. Retainers are usually paid on a monthly basis over a reasonable time frame (usually not longer than 12 months). They are also usually capped at an agreed upon level.
Divestopedia explains Retainer Fees
The retainer should not be so large that it reduces the motivation of the investment bank to earn their success fee on closing the transaction. In general terms, the upfront fee should not be greater than 15% of the overall fee (upfront fee plus success fee). Some less reputable firms charge a large upfront fee to prepare a confidential information memorandum and then put minimal effort into closing a transaction because they have already earned reasonable profit on payment of the retainer for the work performed.
The amount of work fee will first depend on the likelihood of a closing. Bankers often require higher initial retainer fees if they believe that there is a higher risk of not closing. Riskiness may be assessed by many different factors, including how the business owner’s value expectation compares to current market conditions. Good investment banks will not forego the opportunity cost (measured by a success fee) of working on a deal that is unlikely to close. For that reason, on riskier assignments they will propose a higher work fee component to compensate for that risk.
The amount of retainer fees will also depend on the costs that the banker anticipates will be incurred in the initial stages of the project. If the banker will be working exclusively on your deal, the banker will likely charge higher retainer fees in order to cover costs and keep the business running. Regional or bulge bracket investment banks typically charge higher work fees than boutique banks, given their higher overhead costs.
Work fees are sometimes, but not always, deducted against success fees once a deal closes. Be sure to negotiate for these fees to be credited back if the investment bank terminates the engagement or if they otherwise fail to do reasonable work to effectuate a closing.
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