As companies begin the process of preparing for an acquisition, companies often engage an investment banker to assist with and facilitate the transaction. Companies should approach such an engagement as they would with any other relationship with a third party service provider: companies should interview multiple bankers and perform appropriate due diligence on the bankers to ensure the chosen banker is the right fit.
As part of this process, a company will enter into an engagement letter with the selected investment banker. This engagement letter will cover many business terms which can vary depending upon the size of the transaction and other factors. Engagement letters will usually include the following terms, which should be carefully reviewed and negotiated by the company:
- Transactions Covered by Engagement: Typically, “Transaction” can be very broadly defined – companies should ensure that the definition is appropriate and that they will only be responsible for paying a banker fee on the relevant type of transaction. For example, bankers can be engaged to facilitate both a private placement/fundraising effort and/or an acquisition. Often there can be different fees associated with different types of transactions, all of which need to be carefully negotiated.
- Retainers: Investment bankers will typically request retainers – an upfront payment upon the signing of the engagement letter. Companies should ensure that any retainer will be deducted from the fee paid upon the closing of the transaction. Companies can also request that the retainer be paid over a period of months after the execution of the engagement letter.
- Banker Fee: The fee to be paid to an investment banker upon the closing of the transaction can vary significantly. Bankers will often require a minimum fee and an additional fee based upon a percentage of the overall consideration paid to the company or its equity holders (often with a step approach – a certain percentage for a deal in a certain range, then an additional percentage if the range if higher – this approach can align the banker’s interests with the company’s interest).
- Escrows and Earn-outs: Bankers often request payment of the fee based on not just the amount paid at closing, but also any amounts to be placed in escrow or amounts in earn-outs that might be paid based on performance of the company after closing.
- Tail Period: Engagement letters with bankers will include a tail period – a period after the termination of the engagement letter during which if a transaction is closed, the banker still is paid its fee. This provision is often heavily negotiated and companies should try to limit this period to as short a time as possible.
In summary, companies should use care to ensure that the engagement letter signed with an investment banker is carefully reviewed and properly reflects the intended business terms.
For more information on investment banker engagement letters, please feel free to contact Mary Beth.