Selling a company involves the preparation and review of various complex documents, regardless of the type of buyer or investor involved. These documents include marketing materials such as teasers, confidential information memorandums, private placement memorandums, and executive summaries. Additionally, there are information requests for updated financial information, customer contracts, and customer data. Legal documents also play a significant role and require careful review before signing.

The process of preparing, producing, and reviewing these documents is intricate and time-consuming. Therefore, many business owners seek assistance from professionals like bankers, brokers, lawyers, and accountants. It is advisable for you to do the same. However, as a business owner, it is crucial for you to have an understanding of the important components of key M&A (merger and acquisition) documents involved in the transaction process.

The Investment Banking Engagement Letter

The investment banking engagement letter is a crucial document when selling your business. It establishes the terms and scope of the advisory services provided by the investment banker and outlines the economic points that govern the relationship. Understanding the interests of the investment banker is essential for the successful negotiation of this letter.

Here are six key points to consider when reviewing the engagement letter:

1. Fee Arrangement: Investment bankers typically charge a non-refundable deposit or retainer along with a success fee based on closing the transaction. The success fee should be the most significant component of compensation, while the retainer should be credited towards it. A progressive pricing schedule can incentivize the investment banker to achieve a higher sale price.
2. Exclusivity: Granting exclusivity to an investment banker may seem risky, but most qualified bankers will require it. Not giving exclusivity might limit your chances of securing a top professional. To minimize risk, ensure that the deposit/retainer paid is only a small portion of the banker’s overall compensation – not nearly enough to pay for the total time spent on your deal.

“Nearly all qualified investment bankers will require exclusivity.”

3. Term of Engagement: The term specifies how long the agreement lasts, usually spanning 6-12 months. This allows sufficient time for the investment banker to prepare necessary documents, solicit offers, and negotiate a deal.
4. Termination and Tail Period: The engagement letter should state the right of termination after the term of engagement. It may also include a “tail period” where the investment banker receives payment if a transaction is completed within a specified timeframe after termination. Negotiate the fee rights during the tail period to ensure fairness.
5. Reimbursable Expenses: Investment bankers incur expenses during the sale process such as travel, or research,… which should be reimbursed. The engagement letter should allow you some control over these expenses, with monthly reports and approval thresholds for individual and aggregate expenses. violations of these provisions will result in the expenses not being reimbursable should be stated explicitly in The agreement.
6. Covered Transactions: Clearly define the scope of services and transactions covered to avoid inappropriate fee structures. Different outcomes may have different fee implications, so ensure that the engagement letter reflects your specific goals.
   

“To successfully negotiate this letter, it is crucial that business owners understand the interests and position of the investment banker.”

By paying attention to these key points in the engagement letter, you can align the interests of both parties and increase the chances of a successful sale of your business.