What Does Fee Tail Mean?
A fee tail is a type of fee provision included in the engagement letter for investment banking services that relates to the termination provision. If the engagement is terminated prior to closing a transaction, but a transaction is closed within a pre-established tail period (often 12 to 24 months) with a party that was introduced by the investment banker, then the investment banker is entitled to the full fee originally agreed to.
Divestopedia Explains Fee Tail
When negotiating fee tails with investment bankers, company owners should be aware of the following:
- Fee tails should never extend beyond two years. Push for one one year if possible;
- If the engagement letter is terminated by the company owner with cause, then no fee tail should be paid if a deal is subsequently closed; and
- The company owner should approve a list of all parties that are contacted by the investment banker, and this list should be the one used in determining the payment of the fee tail.
We have seen the unfortunate situation where fee tails restrict company owners from executing their exit strategies. Take an example where an investment banker contacts over 100 parties, and the fee tail period is for three years. If the investment banker is ineffective in selling the business and terminated from the engagement, it is unlikely that another banker will market the business while that fee tail provision is still in effect.
