Great M&A Advisory Without Exorbitant Success Fees

When you decide to sell your business, your focus will naturally gravitate towards big-picture questions: What’s the right price? Who is the right buyer? What will happen to my team, and what will be my legacy? Amidst those high-stakes concerns, the precise way your advisor will be paid can seem like a secondary detail. But this single, often-overlooked decision can fundamentally change the outcome of your entire exit. 

For decades, the industry has defaulted to the success-fee model, where an advisor takes a 5-10% commission on the final sale. The problem is, this model creates a powerful incentive for your advisor to close any deal as fast as possible, instead of looking for the best deal for your specific situation. 

This conflict has led Embarc to create a more transparent alternative: the hourly-fee M&A advisory model. But whether or not this payment structure is right for you will depend on your specific goals and priorities as an owner. To choose the model that works best for your business, it’s important to first understand the pros, cons, costs, and critical differences between each structure. 

What is the Success-Fee Model?

The success-fee model is the traditional commission-based structure used in M&A. Success fee advisory firms earn the vast majority of their money only if and when a deal successfully closes, with the final payment being a percentage of the total transaction value. However, this is not the only time a success-fee firm gets paid, nor is this structure as straightforward as it seems. 

How the Success-Fee Model Works

When a success-fee firm presents you with an engagement letter, you will typically find two primary components make up their payment:

• Retainer Fee: This is a non-refundable, upfront monthly fee that firms charge simply to take you on as a client. It can range from $5,000 to over $25,000 per month and is paid regardless of whether a deal ever closes. This is meant to cover the firm’s initial time and resources.

• Success Fee: This is the firm’s primary payday and main incentive. It is a large percentage of the final transaction value, paid only upon the successful closing of a deal. This fee is often calculated using a tiered formula (like the Lehman formula) that applies a decreasing percentage as the deal value increases. For example: 5% on the first million, 4% on the second million, 3%  on the third, and so on. 

But these two headline costs are far from the complete picture. The fine print of the agreement often contains clauses that can significantly increase your future costs and limit your options. Two of the most common hidden clauses include:

• Tail Fees: Tail fee clauses require you to pay the full success fee if you close a deal with a buyer the firm introduced, even if your contract has already expired. These tail periods can last for 6-12 months after expiration. If you sign an agreement containing these clauses and find a way to close the deal without your original advisor, you may still potentially owe them millions. 

• Exclusivity Clauses: This clause locks you into working exclusively with one firm for a set period, typically 12 months or more. If you become dissatisfied with their performance, you are prohibited from hiring another advisor until this period ends. Much like the tail fees, this means that even if you find a buyer independently during this time, you are still contractually obligated to pay the advisory firm their full success fee. 

Pros and Cons of the Success-Fee Model

Although this model became the industry standard for a reason, its perceived strengths often come with significant, built-in drawbacks.  

Pros:

• Perceived Incentive Alignment

While its effectiveness has been questioned, the model’s main sales pitch remains compelling. Success-fee advisors will plainly state why they believe the structure works so well: “We only get paid if you get paid.” On the surface, this translates to an advisor who is highly motivated to close the deal. Proponents of this model will say that by tying their payday directly to the owners, it provides a guarantee that they are working hard on the client’s behalf. 

• Industry Standard Fee Structure

As the most common and well-known model, the success-fee payment structure is what most business owners expect. This familiarity can be comforting, leading many to simply accept whatever costs come as a part of this model as a necessary part of the M&A process. 

Cons:

• Flawed Incentive Structure

Although success-fee supporters may disagree, this model has been criticized for the behaviors it encourages. The core issue is that the motivation isn’t to get the best deal, but to close the deal as fast as possible.

In the highly successful book Freakonomics, economists Steven Levitt and Stephen Dubner famously demonstrated the fundamental flaw inherent to this type of commission-based system. Illustrating their point with real estate agents, Levitt & Dubner found that statistically, agents kept their own homes on the market significantly longer to get a higher price, while encouraging clients to accept low, fast offers. Why? Because when selling their own home, the agent personally pocketed 100% of the extra gain from waiting. When selling a client’s home, the agent’s commission on that same extra gain was so small that it simply wasn’t worth the additional weeks of effort

The same principle applies to M&A. An advisor may push for a quick close rather than spend an extra month in negotiations that could yield a much better outcome for the client. With a success-fee firm, it doesn’t make sense to expend the extra time and resources when they could close the deal, get paid, and move on to the next one. 

• High, Non-Transparent Costs

In addition to the motivational conflict, the final fee in this model is often far from transparent and can be disproportionately large, especially for high-growth, middle-market companies. While a 5-10% commission on a $50 million deal is substantial, the economics for smaller deals can be even worse. This is because many firms set a high minimum payout (often $1 million or more) just to make the engagement worthwhile for them. If your company is valued at $10 million, that minimum fee alone represents 10% of your total deal value, which is a non-starter for many founder-owned businesses. 

• Lack of Focus for the Middle Market

The success-fee model naturally incentivizes advisors to chase the largest deals possible. A 5% fee on a $500M+ deal is a massive payday, dwarfing anything that can be earned from a $30M deal. As a result, top-tier advisory talent is pulled toward these huge transactions, leaving middle-market clients to be passed down to junior staff or receive less focused attention. This dynamic starves the middle market of the senior-level expertise it badly needs.

What is the Hourly-Fee Model? 

Built as a direct response to the incentive issues and high costs inherent in the traditional model, an hourly-fee structure offers a more clear-cut alternative to success fees. Instead of paying a commission on a closed deal, the client pays directly for specific services and expertise the firm provides. Because the firm is being paid for their counsel, not for speed, their only goal is to give you the best advice possible.

How the Hourly-Fee Model Works

By stripping away the layered retainers and percentages, the hourly-fee model mimics the pay structure used by high-end law or consulting firms. Components of this agreement include:

• The Agreed-Upon Hourly Rate: The client is billed at a pre-agreed rate for senior-level advisory work. This payment covers only the actual hours spent working on tasks like financial modeling, buyer outreach, due diligence, and negotiations.
• Itemized Invoicing: Instead of a vague retainer or a large, single fee upon closing, clients receive itemized invoices. This allows founders to see exactly what work was performed, why it was necessary, and when it was done, providing a clear link between cost and activity.

Pros and Cons of the Hourly-Fee Model

While the hourly model directly solves the central incentive conflict of the success-fee model, it introduces a different set of trade-offs by shifting the financial risk of a deal’s outcome to the advisory process itself. 

Pros: 

• 100% Aligned Incentives

Because the advisor is compensated for their time and expertise, the core conflict of interest is removed. This can be essential when it comes to making difficult decisions that could kill the deal. For example, if the best move for the client is to walk away from a bad deal, they can trust the advisor to recommend that action, as it doesn’t put their own payment at risk. A success-fee advisor, on the other hand, loses their entire payday, which creates immense pressure to close any deal, regardless of quality.

• Transparent M&A Advisory Fees and Greater Accountability

The hourly model’s structure lacks the tail fees, long-term exclusivity “golden handcuffs”, and other hidden clauses that are common in success-fee agreements. This places accountability entirely on the advisor. If you are unsatisfied with the value you are receiving, you can end the relationship at any time without penalty. 

• Access to Top-Tier Talent for All Deal Sizes

Under a success-fee model, an advisor will naturally prioritize a $500 million deal over a $5 million deal because the potential commission is drastically larger. The hourly model corrects this imbalance, giving smaller deals the focus they deserve. With this payment structure, an hour of a senior advisor’s time is valued equally, whether it is applied to a $5 million deal or a $500 million deal. This allows founders of middle-market businesses to receive the same dedicated, high-quality time from senior experts that is typically reserved for only the largest transactions.

Cons: 

• Upfront Cost Risk

The primary potential risk of the hourly model is that a company may expend significant funds for advisory services and fail to sell. Unlike the success-fee model, where the main payout is contingent on a close, the hourly fee is paid as the work is performed.

This risk is mitigated, however, by the reputation of your advisor. The most valuable asset a professional services firm has is its track record, so reputable firms will not take on a client unless they have thoroughly assessed the company and are confident it can be sold. And while the upfront cost risk is real, the overall cost-benefit often remains favorable: in a successful sale, the total hourly fees are typically just a fraction of what a traditional investment banking success fee would have been. 

• Fewer Firms Offer This Model 

Another practical drawback is market availability. The success-fee model is deeply entrenched, and the vast majority of M&A advisory firms still use it. As a founder, it can be more difficult to find a high-quality, experienced firm that is built around an hourly-fee structure.