What Does Flat Percentage Success Fee Mean?
Flat percentage success fees are fees paid to investment banker or M&A advisors upon successful completion of a sale of a business. A flat percentage success fee is calculated as a percentage of the company’s enterprise value and is more common on businesses with enterprise value under $10 million.
Divestopedia Explains Flat Percentage Success Fee
Flat percentage success fees may be an appropriate fee structure where negotiating the highest prices is not the primary objective of the seller or in cases where it is will be difficult to garner competitive bids. Investment bankers usually require a higher flat percentage for smaller businesses to ensure that they are adequately compensated for the amount of work they put into the engagement. Often times, a banker has to invest more time and effort to successfully sell a smaller business than to sell a large business. This is because larger businesses have a broader appeal, whereas smaller business may need to look harder for a suitable buyer. A business owner should be aware that in a scenario where there is a flat percentage success fee, 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.