Saturday, February 20, 2010

Finder’s Fee Agreements


I am always willing to pay someone for a deal lead - as are most private equity firms.  The most common mechanism is to sign a finder’s fee agreement in advance. and pay the finder upon closing the investment (so it is a contingent payment).  Typical payout schemes range from 1% to 2% of the deal value – but I generally use the Lehman formula.  The Lehman fee is calculated as 5% of the first million of deal value, 4% for the second million, 3% for the third million, 2% for the fourth million, and 1% for anything thereafter.  The easy way to think about the Lehman formula is 1% plus $100k for any deal over $5MM in value.  I have even paid double Lehman to someone for a strong proprietary lead; but have also paid only 1% for deals where a sell-side broker or banker is already involved.
For those of you thinking of entering into a finder’s fee agreement with a private equity group, make sure you have a multi-year tail on any introductions that you are making.  Deals can sometimes take many months or even years to complete; so protect yourself.
The positives of entering into a finder’s fee is that you can get paid a lot of money, half a million or more, if you introduce a deal to a private equity firm that is completed.  The downside is that you don’t get paid for your work upfront.  But given the upside, it is up to you to manage your time appropriately.  If you have any questions about finder’s fee agreements, email me a question or leave a comment below.

8 comments:

  1. Thank you for this information. I think it is a great launching-point for people (like me) that find themselves on the selling side of a potential PE deal.

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  2. I just sent you an email on the link provided in your contact us page. Hope to hear from you...thanks.

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  3. Do you require that individials you pay finder's fees to for bringing you PE leads be registered/licensed brokers?

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  4. I think this information is a bit outdated in today's regulatory environment. It is very difficult for a PE firm or investment bank to pay a finder's fee to anyone not associated with a broker dealer.....if not impossible. Especially if it is success-linked.

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  5. Why do you say

    "I think this information is a bit outdated in today's regulatory environment. It is very difficult for a PE firm or investment bank to pay a finder's fee to anyone not associated with a broker dealer.....if not impossible. Especially if it is success-linked."

    I'm curious to the legal structure underlying this comment. I was under the impression (from what I have read/individuals I have talked to) that an outside contracter/consultant, regardless of their status as a legal broker dealer, was free to make finder's fees/commission etc. Please educate me if this is not the case - any links would be much appreciated as well.

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  6. http://www.mondaq.com/unitedstates/x/230618/Securities/Finders+May+Pose+Risk+In+Private+Capital+Raising - I just commented above - this is an interesting take on it

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  7. As I understand it, the use of finder's fees (contingent on success) would in the SEC's view require a broking license, but the courts decided that a success fee by itself was not sufficient to require registration.

    We've just launched MergerMuse (www.MergerMuse.com), a new website which allows companies looking for acquisition targets to enter in to finder's fee type agreements with users from around the world.

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