Hourly Investment Banking vs. Success Fees: How to Choose

Success fees remain the way most middle-market merger advisors earn the bulk of their revenue. Under this model, an advisor isn’t paid until the deal closes.

Hourly investment banking is an alternative model where an advisor is paid for the time spent helping you reach the right decision, including a decision not to sell.

The two models reward different outcomes, and the right one depends on how certain you are that a transaction is the answer.

Oaklyn Consulting bills for time and charges no success fee, and we refer deals to traditional investment bankers when their model serves the client better. Both models have a place. The choice comes down to a few variables you can assess before you sign an engagement letter.

How a success fee works

A success fee is a commission the advisor earns at closing, calculated as a percentage of the transaction value. If the deal doesn’t close, the advisor earns no success fee.

The Lehman Formula is the most common structure, used by 51% of the advisors in the Firmex US M&A Fee Guide 2023-24. In its classic version, the fee is 5% of the first $1 million, 4% of the second million, and so on down to 1% on everything above $5 million. Many advisors use a “Double Lehman” formula that starts at 10% and falls to 2%, and about one-third charge a flat percentage regardless of deal size.

The percentage falls as deals grow. Advisors in the Firmex survey quoted an average success fee of 6.3% on a $5 million transaction and 1.8% on a $150 million deal. Two other terms can matter as much as the percentage:

Minimum success fees. Three-quarters of advisors charge a minimum success fee, a floor they collect at closing even when the formula produces a smaller number.
Engagement fees. Three-quarters of advisors also charge some form of engagement fee, such as a monthly retainer or an upfront payment.

We walk through a full Double Lehman calculation, including what the math does to a smaller sale, in our comparison of consulting and investment banking.

How hourly investment banking works

With hourly investment banking, your advisor bills for the time spent on your engagement, with no fee tied to whether a transaction closes. You pay for advice and execution, and the advisor earns the same whether you sell, restructure or walk away.

At Oaklyn Consulting, we start by defining the scope of the project. If your situation changes, we can increase our involvement, reduce it or stop. This allows you to pay for only the work you need. Some clients hire us to run a full sale process. Others need help with one piece, such as evaluating an unsolicited offer, building a financial model or negotiating from letter of intent to closing.

Our work with a physician group demonstrates what that independence is worth. The practice received an unsolicited offer from a private equity-backed roll-up. We guided the doctors through due diligence, built a financial model for the practice and represented them in negotiations. The doctors agreed the final offer was fair, but declined it because they valued their autonomy more than the money. We describe that engagement and three others in how our time-based billing approach helps. An advisor paid only at closing earns nothing on that outcome. We counted it as a success.

What each fee model pays your advisor to do

Neither fee structure makes an advisor dishonest, but each one creates a different pressure for the advisor.

A success fee pays for a closed transaction at a good price, aligning the advisor with you monetarily and giving them motivation to keep a stalled deal moving. The advisor carries the risk that the deal never closes, which is priced into their fee. In the Firmex survey, 59% of advisors called the riskiness of closing a very important factor when setting a success fee percentage. Fees rise as closing gets harder: 37% of US middle-market merger advisors increased their fee levels in 2023.

The risk is large. The Exit Planning Institute reports that only 20% to 30% of businesses that go to market sell. An advisor who earns nothing on the others has to recover that cost through higher percentages, minimum fees or careful deal selection.

Hourly investment banking pays for time and judgment. Your advisor has no stake in whether the deal closes, so a recommendation to wait, restructure or decline costs the advisor nothing. The trade-off sits with you. You pay for the work whether or not a transaction happens, and a long process costs more.

When a success fee is the better choice

A success fee makes sense when you’ve decided to sell and want an efficient, competitive process. If your company fits a traditional investment bank’s criteria and you want an advisor whose payment rises with the sale price, the success-fee model serves you well.

The best deals for this model have these qualities:

The company is large enough that the percentage produces a fee the bank wants, without a minimum fee taking a large share of the proceeds.
The decision is made, and an auction among several buyers is the goal.
The financials are clean, the owners agree and the likely buyers are clear.

We refer clients who fit that profile to an investment banker. Traditional investment bankers are our referral partners, sending us the deals their model doesn’t fit.

When hourly investment banking fits better

Hourly investment banking fits the situations that strain a success fee: deals that are small, uncertain or complicated, and decisions that might not end in a sale.

You haven’t decided whether to sell. An hourly engagement lets you explore the market before you commit. The Semprebon family used a time-based engagement to test the market for Calmont Beverage, their multigenerational Vermont distributor, before committing to a sale.
Your deal sits below a bank’s minimum. With 75% of advisors charging a minimum success fee, a smaller transaction can lose a large share of its proceeds to the fee floor. Oaklyn Consulting has no minimum deal size.
The dynamics are complicated. Family disagreements, tension between a board and a CEO, or a nonprofit’s adherence to its mission can matter more than the price. Those deals take judgment and time, and they may end without a transaction.
You need help with part of a deal already underway. Essco Calibration Laboratory brought Oaklyn Consulting in on a limited scope, from letter of intent to closing, on its $84 million sale to Transcat.
You already know the buyer. A negotiation with one buyer doesn’t need an auction, and you shouldn’t pay auction-sized fees for it.

Founder- and family-owned companies often have several of these elements happening simultaneously. We explain how we work with them on our page for founder and family-owned businesses.

Frequently asked questions

Is hourly investment banking cheaper than a success fee?

Hourly investment banking costs less when a deal is small, stalls or ends without a sale, and it can cost more on a large, fast auction. Advisors in the Firmex survey quoted an average success fee of 6.3% on a $5 million transaction, or about $315,000, before any engagement fee. Compare the total you expect to pay under each model for your deal’s most likely outcome.

Do investment bankers charge by the hour?

Most middle-market investment bankers combine a success fee with an engagement fee instead of billing by the hour. Three-quarters of advisors charge some form of engagement fee, and 27% of firms raised their monthly or hourly fees in 2023. Oaklyn Consulting bills for time and charges no success fee.

What is a minimum success fee?

Advisors collect a minimum success fee at closing, even when the percentage formula produces a smaller amount. Three-quarters of middle-market advisors charged one in 2023, and many said they were raising their minimums. On a smaller transaction, the minimum determines how much of the sale price you keep.

Can I bring in an hourly advisor after a deal has started?

Yes. You can add hourly advice at any stage, including after you sign a letter of intent. Mike Walsh, CEO of Essco Calibration Laboratory, described it this way: “That was the real value of Oaklyn Consulting, being able to add them to the deal midstream.”

Does Oaklyn Consulting ever recommend a success-fee investment banker?

Yes. We refer a deal to an investment banker when a company fits a traditional investment bank’s criteria and the owner wants a competitive auction. Our relationships with investment bankers work in both directions.

Choosing between the two models

Start with certainty. If you’ve decided to sell, your company fits a bank’s criteria and you want a competitive auction, a success fee aligns your advisor with price. If you’re still deciding, your deal is small or complicated, or you need help with one part of a transaction, hourly investment banking advice doesn’t depend on a closing. Price both models against your deal’s most likely outcome, and choose the one that pays your advisor for the result you want.

Talk with us

If you’re weighing a sale, a capital raise or an offer you didn’t expect, request a consultation. We’ll tell you which fee model fits your situation, including when it isn’t ours.

References

Firmex, US M&A Fee Guide 2023-24: success fee structures, average success fees by deal size, minimum success fees, engagement fees and fee changes, from 189 US respondents.
Exit Planning Institute, State of Owner Readiness: the share of businesses that go to market and sell.

About this piece

Oaklyn Consulting is an investment banking advisory firm in Chattanooga, Tennessee, founded by Frank Williamson in 2016. The firm has worked with more than 200 clients on mergers, acquisitions, capital raises and recapitalizations, acting as consultants on a time-based billing model with no success fees.

Experience the Oaklyn Consulting Difference

Oaklyn Consulting brought senior-level attention and analytical rigor to every stage of the process. They understood my business, ran a thoughtful and disciplined sale process and helped me make sound decisions when it mattered. I couldn't have asked for a better team in my corner.”

Jarod BuschFounder, 911 Custom LLC

(If) you've never been through this before, you've never done it before, frankly you're out of your depth and you're lost, you need someone that's going to pilot this through with you, as sort of the copilot, and your mentor and advisor. I absolutely feel very strongly that that's the role that Oaklyn Consulting played for me, and I would always recommend them.”

Eric FulmerCEO, ShotFlow

Oaklyn Consulting did a great job for us on Axial. The unfortunate outcome there had everything to do with the company's situation and the market environment. The board and investors all agree on what a thorough, professional, top-notch job Oaklyn Consulting did for us. I wouldn't hesitate to work with them again and in fact will look for opportunities to do so.”

Board MemberAxial Exchange

That was the real value of Oaklyn Consulting, being able to add them to the deal midstream. If you’re in that situation, I think Oaklyn Consulting is a great fit.”

Mike WalshCEO, Essco Calibration Laboratory

If you’re on the fence, I would say meet Frank and his team. I would recommend him to anyone who is considering selling their company, even if they’re just exploring their options.”

Al HemondCEO, Professional Disability Associates

Without him, I wouldn’t have gotten these deals done. There’s no question in my mind.”

Janet ElkinCEO, IMN Enterprises

Eighty years of family history does not get sold in a hurry. Oaklyn Consulting understood that from the first conversation.”

Jamie SemprebonCalmont Beverage

Oaklyn Consulting told us to pause when everything in me wanted to keep moving. Six weeks later, we closed clean. That advice was worth more than the process itself.”

Jeremy GrenierCEO, Calmont Beverage

I know they had other clients, but we felt almost like we were their only one at the time just by how much attention they paid to us. They’ve got a good team that can walk you through the process step by step, and they’re going to give you the attention you deserve.”

Devan WelchSenior VP and General Manager, Powell Construction

We really appreciated your willingness to adapt to the unique nature of our engagement — i.e., advising both sides — rather than forcing us into a typical approach.”

It was a very helpful professional experience. You are very knowledgeable and explained how you work transparently, even offering that you were probably not a good match. That is rare. Most people try to force-fit their model to every opportunity.”

As I stated many times during our conversations, I so appreciate you and your team for interceding throughout this transaction. It made such an incredible difference!”

Excellent setup and organization of data as well as business-level guidance for transactions.”

Candidly — I appreciated that you were thoughtful about when and where to engage knowing that we had sensitivities to fees. It often felt like you’d give us tools we could use to work through things on our own and then jump back in as needed to add value where you uniquely could.”

You continue to be my go-to for business owners thinking about their business options. I appreciate your approach and everyone I have sent you has said good things.”

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When running a business, making the right and crucial capital decisions can be the difference between success and failure. With Oaklyn Consulting by your side, you can confidently make the decisions that will shape the future of your business.

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