M&A Glossary: Virtual Deal Room 

  A deal room is a secure, virtual space where buyers and sellers can share and exchange confidential information related to a potential transaction. Information is typically stored and accessed through a secure online platform that allows users to view, download, and upload documents and other information as needed.

The use of a deal room is essential in M&A transactions because it allows buyers to perform their due diligence in a secure and confidential manner. By limiting access to sensitive information and tracking who has viewed or downloaded content, deal rooms help to minimize the risk of information leaks or other security breaches.

These are some questions you should be asking as you search for the right deal team:

Why do you want to represent my business? In today’s market, a successful investment banker will turn away more opportunities than they accept. They need to know they’re a good fit for you and your business. And they need to be confident they can successfully sell your business and meet your goals.

What’s your fee structure? The fee for an advisor’s services can vary depending on the size and complexity of the transaction. The 2022-2023 M&A Fee Guide from FIRMEX helps pull the curtain back on M&A fees, revealing what’s normal and customary for the industry.

The bulk of the cost will come as a success fee, after a deal closes. The most common fee structure, used by 40% of survey respondents, was the Lehman formula in which the fee percentage decreases as the deal gets bigger. Roughly a third charge a basic flat fee, and 18% used an accelerator formula which gives the advisor a higher percentage on deals that exceed benchmark.

According to the FIRMEX report, the most common fee for a $5 million deal is between 6.1 to 8%. For deals over $150 million, the most common fee is between 1.1% and 2%.

Most investment bankers (81%) also charge an upfront retainer. According to the FIRMEX report, lump-sum retainer fees generally fall in the $26,000 to $50,000 range, while monthly fees fall between $5,000 to $10,000 a month.

When evaluating advisors, consider whether their fees fall within the ballpark above. If fees are significantly higher or lower, proceed with caution. The right fee aligns the advisor’s incentives with your own.

What is your experience in selling businesses like mine? Consider deal size as well as industry experience. Do they consistently work on deals of similar size? Also, no advisor can be well-versed in every industry, but they may have partners with strong experience in your space.

Who have you worked with in the past? Ask to speak with a few past clients directly. Do they feel they got good value in exchange for the advisor’s fee? Was the advisor transparent and forthcoming with status updates? Did they do what they said they’d do?

How many people will work on my deal? An investment bank will typically have a team of people assisting with marketing, research, and managing the details of due diligence. Expect a mix of senior advisors with experience and contacts as well as more junior analysts to help manage the workload.

How many other deals will you be representing? Arguably, a lead advisor with a full team behind them could successfully represent four or five engagements at a time. Much beyond that, and they could lose focus or be unavailable to you at critical times.

What is your success rate and why have deals failed in the past? No investment bank closes every one of their transactions. There are many reasons deals fall apart, including unforeseen market changes, inaccurate business records, and shareholder conflicts, just to name a few.

A successful advisor will be able to identify a lot of pitfalls ahead of time and may not take on higher risk deals. Asking this question can help you get a sense of how confident they are in their ability to sell your business, as well as how they handle bumps in the road. 

On average, how many offers do you get per deal? You’re looking for an investment bank who can bring multiple buyers to the table at the same time. This creates an auction-like environment and gives you options to choose a buyer that’s the best fit for your goals.

What’s your average over benchmark? The benchmark is a private target set between the seller and the advisor. In the lower middle market, deals are marketed without a published asking price so as not to create an artificial ceiling on deal value. An advisor who outperforms benchmark is doing the necessary work to obtain the maximum value the market will bear.

How will you ensure the confidentiality of my business information? Ask if you’ll be able to review marketing materials and buyer lists before information is released. Talk about other steps, including non-disclosure agreements, secure online deal rooms, buyer financial disclosures, and other tools that will be used to protect confidentiality and vet buyer inquiries throughout the sale process.

By asking these questions, you can gain a better understanding of an advisor’s qualifications, experience, and approach, and determine if they are the right fit for you.