Typical finder's fee / management fee for self-funded searchers?

February 08, 2021

by a searcher from Hillsdale College in New York, NY, USA

What are typical terms for a finder's fee / closing fee? I've seen a lot of numbers and I'm not sure what most investors are comfortable with. Assuming it all roles into equity, is 5% of equity high or low, or do you base it on EV?

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Reply by an intermediary
from Indiana University at Bloomington in Carmel, IN, USA

redactedLuke Tatone‌ for the Tag. Finder Fees to me suggest that someone has found a company that they don't represent, and they just pass it along to someone else. Just an intro and no further help. We have done this a few times when we find a business that is a better fit for a PE firm than an individual (size or they want to sell a part of the company). Our expertise is helping individuals and companies find businesses for sale that are not listed on the open market (80% of the businesses that sell are not listed). This is a marathon and not a sprint, takes a lot of effort but well worth the investment. Typically a retainer for a short while then a success fee upon closing. 95% of our deals, we are the only one in them.

Reply by an investor
from University of California, Berkeley in San Francisco Bay Area, CA, USA

If you are talking about a situation where a finder introduces a company to a self-funded searcher, then the so-called Lehman formula is market (5% of first $1M, 4% of the next $1M, 3% of the next $1M, etc). The fee is paid on EV. If you roll the fee into preferred equity, you would likely end up with ~ 2-5% of the total equity after paying for income taxes on the finder's fee and assuming that preferred equity is convertible to 20-50% of common stock.

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