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M&A (mergers and acquisitions) advisors assist businesses with the financial transactions required to consolidate, buy, or sell companies or assets. They typically charge anything from 3% to 8% of a deal's value in fees and commissions for the lower and middle markets. To enable small businesses and middle-market companies to receive high-quality expert financial services, we must fundamentally alter this system. 

Changing M&A fee structure

My background—a mix of investment banking, consulting, and entrepreneurship—enabled me to find a way to revise the typical M&A fee structure in order to make M&A advisory services available to everyone. I worked six years at Goldman Sachs as an investment banker, three years at McKinsey & Co. in corporate finance, and co-founded network security solutions startup that was VC funded.

When I left Goldman, I decided to return to the world of entrepreneurship. As I offered freelance Corporate Finance advisory services to several startups, I realized first-rate financial expertise had an enormous impact on these companies. 

Top-notch corporate finance services should be available to everyone, including startups, small businesses, middle-market, and smaller public companies. Unfortunately, most M&A advisors work for either commissions or flat fees. Changing the fee structure is the only way to deliver the highest quality financial advisory skills to an under-served market that typically does not have access to this caliber of talent.

The problem of charging commissions for M&A advisor fees

During my time in investment banking, I started considering what it would take to change the system. At typical investment banks, employees do a lot of free work under the name of client service. They only get paid when their clients engage in transactions. 

High commissions are necessary because These deals are notoriously difficult to complete. They fall apart for all types of reasons. When advising a company to make an acquisition, the client is often one of many suitors, and the odds of a successful purchase are slim. 

Investment bankers work late nights, travel, and constantly pitch new fee opportunities. They fight tooth and nail because some of these mandates land eight-figure commissions. Prizes like that make up for calories burned chasing unfruitful opportunities.

Hourly fees aren't typically attractive to investment bankers because they operate more like brokers. They reduce their roles once a letter of intent is signed or the draft purchase agreement is in motion. Instead of seeing deals to the end, they are forced to start hunting the next elephant. 

The problem of charging flat M&A advisor fees

When I worked for McKinsey & Co, we provided advisory services to the world's leading companies on various topics. Instead of charging commissions, we charged flat fees regardless of the outcome.

Most projects McKinsey took on could be scoped before the project was undertaken. Because we were able to determine every aspect of a project, we could deliver work on fixed fees. 

M&A deals, on the other hand, often take on a life of their own. They expand in scope more than any other financial projects I know. This unpredictability prompts so many late nights for the investment bankers of the world. Charging flat fees does not allow companies to offer the deep transaction expertise that investment banks can provide by charging high commissions. 

Benefits of charging hourly M&A advisor rates instead of flat fees and commissions

I wanted a way for expert M&A advisors to be paid regardless of the outcome and charge clients only for the work accomplished. I determined an hourly rate was the best way to offer quality M&A advisory services to everyone. 

Charging hourly fees instead of commissions or flat fees benefits low and middle-market clients in particular. Because many of these clients do not have the benefit of working with top M&A firms, they often try to handle financial transactions themselves or with underqualified advisors. People don't sell their homes without realtors, and they definitely shouldn't attempt selling their businesses without qualified advisors. You'll notice that top companies such as Google, Facebook, Uber, Stripe, and Twitter hire CFOs and strategic finance teams from leading investment banks.

Hourly rates in place of commissions or flat fees enable M&A Advisors to be more fully engaged in every aspect of the clients' transactions. They do not have to steer clear of the detailed execution of deals, searching for the next big opportunity. They can also stay with a client even when the scope of the agreement changes. Charging an hourly rate brings a different philosophy and an entirely different business model to M&A advisory services. 

Impact of hourly fees on financials for clients and advisors

Hourly rates mean clients pay much less. Our fees tend to be comparable to legal advisors' fees. In contrast, typically the financial advisor gets paid much more than the legal advisor when a deal is consummated under the current brokerage fee model. 

These hourly rates reflect the value of our work as M&A advisors better than commissions or flat fees. After all, the work we do for startups and small businesses on low seven-figure deals is just as valuable as the work investment banks do on high eight or nine-figure deals. 

Rather than thinking of ourselves as brokers, M&A advisors should work along with a company's corporate development team as an extension of the management team's resources. Such a closely aligned service can be available to all businesses only by abandoning conventional commissions and flat fees in favor of the revolutionary concept of hourly rates.