Understanding the M&A Engagement Letter

The M&A process requires the creation of a number of important documents, including the Letter of Intent, purchase agreement, and non-disclosure agreement. However, the primary agreement document is the engagement letter, which is an agreement between the M&A intermediary and their client (most often the seller). This document determines the fee structure for the advisor as well as their duties to their client. It is a superb opportunity for the intermediary and the seller to discuss objectives for selling the business and lay the groundwork for the process. The following outlines the most important sections of the engagement letter and what may be expected from them.

Any quality M&A advisor will require exclusivity. The seller should require that the intermediary work exclusively with them for the span of the M&A process, and likewise. This helps to protect confidentiality, as well as inhibits the seller from choosing a different advisor halfway through the process. A specific length of time for exclusivity should be set.

Most engagement letters will set a determined term for the engagement, and then will automatically renew on a monthly or quarterly basis until the M&A process has been completed as long as neither party terminates the agreement. There is also typically a carryover period for buyers introduced during exclusivity.

Fee Structure
The fee structure determines how the M&A intermediary will be compensated. Lehman Formula is a common type of payment structure in M&A. Whatever the rate of pay, it will almost always be partially based on the success of the deal. Small business fees tend to be based on a flat percentage of the total selling price, while larger businesses have a sliding scale on the first one million in the selling price. Basing the fees on the selling price is the best way to ensure that both parties are working toward a common goal of getting the biggest payoff.

Scope of Services
The advisor will want to clearly define the services that will be provided under the fees discussed. Many intermediaries offer other services such as
valuations, expert testimony, litigation support, and more.

Non-Disclosure and Indemnification
Perhaps the most important part of this document is the non-disclosure clause. It is imperative to keep the news of the sale under wraps until the deal is complete. Never hire an intermediary that does not sign a non-disclosure form right away.

There will also be an indemnification clause that will determine what sort of compensation each party will be required to offer if the non-disclosure contract or any other terms in the engagement letter are breached.

Now that you know what to expect from the engagement letter for an M&A deal, it is time to get started on your search for the perfect M&A advisor for selling your business. George & Company has a number of highly trained and certified M&A intermediaries, so contact us today in complete confidence.