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Investment bankers will represent only one side of the transaction and most prefer to work on behalf of the seller. That’s because sellers tend to have a higher motivation to complete a transaction and it’s generally easier to find buyers than it is to find sellers. This, of course, increases the probability of investment bankers’ getting paid for their efforts.

Most investment bankers receive a retainer and progress payments to cover their costs during the process of preparing a “book” (a profile of the seller’s business) and seeking prospects. Monthly retainers can range from $10,000 to $50,000. Often these retainer fees do not offset the success fee. They are regarded as part of the cost of planning and searching. The success fee typically ranges between one percent and three percent of the purchase price, depending on a variety of factors including the size, complexity, and scope of the engagement. Some investment bankers have a minimum fee upon closing, so it’s important that you judge how well they can add value to the transaction.

The banker also works closely with the seller to understand the culture and philosophy of the firm. A good banker will get the initial list of potential buyers down to six or seven target firms to engage in a discussion about the sale. From that list, it elicits firm expressions of interest before it goes any deeper into the discussions and negotiations. To encourage bidding and a better deal, the banker generally keeps several prospective buyers moving along at the same pace. Ultimately, the banker together with the client will decide on one firm with which to negotiate in earnest.

That’s the point at which the investment banker delivers some of its greatest value. The intermediary’s ability to help the seller negotiate the fine points in the letter of intent–and the purchase agreement–can considerably increase the money going to the seller. Throughout the negotiating process, the seller should expect frequent communication from the banker and see material progress within three to six months. The sale of a large advisory firm takes time, necessarily, but events can move fast at certain points in the process.

The Pros & Cons

With an investment banker, you’re hiring someone who is typically unemotional about the deal and motivated to help his client get the best deal. In evaluating offers made to four separate advisory firms by a consolidator, we saw that those who engaged an investment banker to assist them received a better offer and a better contract than the two that did it alone. Although this is a very small sample and anecdotal, the parallel for financial advisors is clear. As the millennium market crash proved, investors who did not consult their professional advisors tended to do worse than those who were guided by experienced and skilled investment managers, wealth managers, and financial planners.

One circumstance where it may not be necessary to engage an investment banker but rather work with an attorney, accountant, or succession consultant would be for internal transactions. In these cases, the issues that arise may involve how to prepare the successors for operating the business as well as for acquiring ownership. In addition, it may be necessary to build a partner track, a valuation formula, and a career development plan to ensure continuity of the enterprise. Advisors in these circumstances rarely if ever charge a success fee but often will charge project or hourly fees for their work. [Conflict of Interest Alert: Yes, this is something my firm offers.]

Most people get to buy or sell a business only once. Although they may have been adept at the management of the practice, they face considerable risk in negotiating a deal without at least the help of a competent and experienced attorney and CPA. But as the deals get bigger, it becomes even more prudent to engage a professional mergers-and-acquisitions advisor who’s experienced in the art of deal making. Such professionals aim to consummate the transaction in a way that fulfills the goals of the person they represent–whether that’s a buyer or a seller.

Mark Tibergien, a principal in Moss Adams LLP, is chairman of the firm’s Securities & Insurance niche. A nationally-known consultant to financial advisors, he is the co-author of Practice Made Perfect, available through the IA Bookstore. E-mail him at [email protected].