Transaction value, and where buyers overpay the fee

Buyers negotiate the percentage and sign the definition. It is the wrong way round. On a $20 million acquisition, moving the fee from 2.6% to 2.4% saves $40,000. Moving the definition of transaction value by thirty per cent moves the fee by $160,000 — and the definition is usually accepted as boilerplate.

This note sets out what goes into the base, why, and which three items are worth an argument.

Enterprise value is not the equity cheque

The starting confusion is that “the price” means different things to the buyer’s cash flow and to the fee calculation. Advisory fees are almost universally computed on something closer to enterprise value than to the equity consideration, and for a defensible reason: the advisor’s work does not shrink because the target happens to carry debt.

Two acquisitions of the same business, one with $6 million of debt on the balance sheet and one debt-free, involve identical origination, outreach, qualification and negotiation. If the fee were computed on equity consideration alone, the first would pay meaningfully less for the same work. The convention exists to remove that arbitrage.

The consequence to understand is that a business bought for $8 million of equity with $6 million of assumed debt is a $14 million transaction for fee purposes. That is normal. It should not be a surprise at closing.

What belongs in the base

The standard and defensible construction:

Component	Treatment
Cash paid at closing	Included
Securities or other non-cash consideration	Included, at fair value
Debt assumed, refinanced or repaid at closing	Included
Deferred consideration, seller note, holdback	Included, at face value
Escrow	Included, at face value
Rollover equity retained by sellers	Included, valued as for non-rolling sellers
Earn-out and contingent consideration	Only if, as and when actually paid
Ordinary-course working capital adjustment	Excluded
Third-party transaction expenses	Excluded

Most of these are uncontroversial. Three are worth attention.

Earn-outs: the item that decides the argument

An earn-out is consideration that may never be paid. There are three ways an engagement letter can treat it, and they are not close to equivalent.

Fee on the maximum, payable at closing. You pay a fee on money you have not paid and may never pay. On a deal with $12 million at close and $6 million of earn-out, this charges you as though the deal were $18 million. If half the earn-out fails to vest, you have paid a fee on $3 million of consideration that never existed.

Fee on a discounted or probability-weighted amount at closing. Better, but it requires agreeing a probability at exactly the moment neither side can know one, and it still charges for money that has not moved.

Fee if, as and when paid. The earn-out becomes fee-bearing only when the payment is actually made, with the corresponding fee due within a defined window afterwards. This is the correct treatment. It aligns the fee with the buyer’s cash flow, removes an argument that cannot be settled at signing, and costs the advisor nothing they are entitled to.

If an engagement letter proposes the first, that single clause is worth more than every other negotiation in the document.

Rollover equity: included, and it should be

Buyers frequently push to exclude rollover on the grounds that no cash leaves the building. The argument does not survive contact with what rollover is: consideration the seller elected to take in equity rather than in cash. It is part of the price, it is negotiated as part of the price, and excluding it would create an obvious incentive to restructure consideration to shrink the fee.

The right question is not whether rollover counts but how it is valued. It should be valued on the same basis as the consideration paid to non-rolling sellers — not at a promoter’s projection of what the equity will be worth later. Say so in the document.

Payments dressed as something else

Consideration is sometimes routed around the purchase price: an inflated consulting agreement with the departing owner, a non-competition payment far above the value of the covenant, an employment package that is really deferred purchase price. Where these exceed fair market value for the services concerned, the excess is consideration and belongs in the base.

This clause protects the advisor, and buyers occasionally resent it. It is also the clause that makes the fee resistant to being engineered away, which is what allows a firm to work for months at risk. Left out, the success-fee model does not function.

Working capital and expenses: out

A completion accounts adjustment for ordinary-course working capital is a true-up, not price. It should be excluded, and an engagement letter that includes it is either careless or opportunistic. The same goes for transaction expenses paid to third parties — legal, accounting, diligence — which are your costs, not consideration to the seller.

Two mechanical points

Who calculates, and when. The letter should require the buyer to deliver a written calculation of transaction value with supporting closing documentation within a short window of closing — five business days is standard. Absent that, the number gets settled by correspondence months later, badly.

Currency and timing of non-cash items. Securities and rollover should be valued at a stated date on a stated basis. “Fair value” alone is an invitation to a dispute.

The short version

Ask for the definition before the percentage. Then ask three questions:

Are earn-outs fee-bearing at closing, or if, as and when paid?
On what basis is rollover valued?
What is expressly excluded?

An advisor who answers all three without hesitation has had the conversation before. One who calls the definition standard and moves on has told you what the negotiation is going to be like.

Our own fee base is published in full, item by item, on the fees page.