Success Fee

Commission paid to an advisor for successfully completing a transaction

What is a Success Fee?

In finance, a success fee is a commission paid to an advisor (typically an investment bank) for successfully completing a transaction.  The fee is contingent on “success,” or by achieving the client’s goal, and thus aligns the interests of the client and the advisor.

A success fee is typically a percentage of the deal value or the enterprise value of the business being acquired or sold.

 

Success Fee

 

Benefits of a success fee structure

There are many reasons for using a success fee structure for a deal or transaction, with some of the most common ones listed below.

The benefits include:

  • Alignment of interests between the client and advisor
  • No fee paid if there is no successful outcome
  • Incentivizes the advisor to get the best possible deal (i.e., a percentage of the sale price)
  • Simple structure is easy to understand

 

Drawbacks of a success fee structure

Like everything in business, there are tradeoffs to consider when deciding whether or not to use a success fee structure.

The drawbacks include:

  • If the probability of success is low, the advisory may give up or stop working on the deal for fear of not making any money
  • If the fee structure is flat, the advisory may be incentivized to close the deal as quickly as possible rather than spend time trying to get a better deal
  • The advisor bears a lot of risks
  • May be more expensive than a work fee or fixed charge

 

Example fee structure on a deal

In this scenario, imagine a client approaches an investment bank to sell their company for the highest possible price. The following fee structure is negotiated: 2% of the transaction value up to $500 million and 5% of any excess value over $500 million. In this example, the bank finds a buyer for the business willing to pay $650 million. The total success fee would be $10 million on the first portion and $7.5 million on the additional value above $500 million.

 

Ranges of success fees

There is a wide range of fees that are charged on the sale of a business in investment banking. Below is a very rough guideline of ranges that can be seen in the industry:

  • $0-10 million: >10%
  • $10-100 million: 3-10%
  • $100-1 billion: 1-3%
  • >$1 billion: 0.5-1%

 

Additional resources

Thank you for reading this guide to contingent fees in investment banking advisory business. To continue learning and advancing your career, these additional resources will be helpful:

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