Investment Banking Fees Breakdown

When a company employs an investment banker to assist with mergers and acquisitions (M&As), public offerings (IPOs), or fundraising, the firm typically pays the investment banker a fee. 

An agreement between the company and the investment banker spells out the services. The investment banker provides it, and the payment is to be made to the investment banker.

There may be extended back-and-forth between the parties concerned until everyone is satisfied with the terms.

Let’s take look at the Investment Banking Fees Breakdown below:

Investment Banking Fees Basics

The cost of using an investment bank depends on the firm and the specific services required. Investment banker compensation typically consists of three parts:

  • A monthly retainer
  • A lump sum paid at closing
  • A share of any equity created by the transaction

These payments typically range from 3-10% of the money raised or the M&A deal’s worth. A banker’s compensation rate is affected by the amount of money at stake and the time and effort required to complete the transaction.

The investment banker fees sometimes also depend on the type of capital raised. It costs almost twice as much to hire an investment banker to raise equity capital as it does to raise loan capital, for instance. 

Investment bankers’ recommendations may also depend on this distinction in particular circumstances.

Types of Investment Banking Fees

Investment banking fees can differ significantly between firms and transactions. In general, the financial value of a percentage increase will be higher for agreements that need a greater investment of time and resources.

Costs might fluctuate widely from one transaction to another and from one company to another. You might expect to give up a larger percentage of the deal’s total value the less money you stand to gain from it. 

Capital raises and other sell-side transactions can be particularly costly for the issuer.

Retainer Fees

A retainer fee is a predetermined payment made to the investment banker regardless of the deal’s outcome. In most cases, a successful investment banker will ask for a monthly retainer fee from the company they represent. There are two functions that a retainer can fulfill. 

Firstly, it ensures the bank’s dedication to the account by providing adequate motivation to close the deal. Another way of saying this is that “you get what you pay for.” Second, a proper retainer aids in committing the seller to a specific course of action, in this case raising capital or selling the business.

The retainer will vary substantially based on the nature of the contract and how long it is expected to last. For more complex transactions, the retainer will be “front-loaded” or paid in full before any work is done to mitigate the increased risk associated with the preparation and sale.

Upfront Fees

When hiring a service, it’s common to pay a hefty chunk of change in advance. This is akin to a retainer and may involve an initial retainer payment to secure the seller’s dedication. If the task is anticipated to be simple, the retainer could be rolled into the initial cost.

Expense Reimbursement

Without the consultant’s requirement to avoid out-of-pocket expenses like travel, meals, paperwork, and entertainment, the engagement would fall short of its potential. All transaction costs are normally levied straight to the customer.

Success Fees

Each deal can generally stand alone, but many are based on the Lehman Formulas. One thing similar to almost every deal is the fact that most success fees are offset by the amount already spent on company retainer costs. That is, retainer fees are generally subtracted from any final success fee.

Minimum Fees

Any transaction with a bank will have a predetermined minimum closing amount; this money is determined by the size of the bank with whom you are conducting business. 

This sum could be anywhere from $100K to $1 million, and it is frequently dependent on the level of experience and size of the business and the magnitude of the contract being negotiated.

How Much Should I Pay in Engagement/Retainer Fees?

In any business consulting arrangement, the consultant is going to require the consultee for some type of upfront money for performance. How much is paid is typically arbitrary and almost always negotiable? The question is, how much should you pay as a retainer for services rendered? As always, it depends. First, let’s ask a few non-rhetorical questions.

What type of experience are we talking about? How long has the company been in business?

What does the firm’s professional network look like? Do the founders have what might be termed a Rolex Rolodex?

What specific skill sets are you looking for? Will the consultant have the ability to fulfill the requirements of the particular project?

Advisory Services

Despite what you may have read above, not all investment banking services have the same associated costs.

Companies can benefit from transaction advising services such as quality of earnings assessments, due diligence, and consultancy in various situations. For example, to prepare for a sell-side transaction, corporations frequently hire financial advising teams, who are paid either an hourly fee or a fixed project price. 

Performance enhancement, interim management, and value advisory are only some of the additional financial advising services billed hourly.

This is all from our side about the investment banking fees. If you want to learn more about Finance & Technology, visit our Akibia to find out.