By: Amanda Reseburg

The mergers and acquisitions (M&A) space has traditionally worked under a “success” fee structure that defined the industry for generations. Now, Embarc Advisors is upending the M&A space with their hourly model, an innovative approach to fee structures.

Led by founder and managing partner Jay Jung, Embarc Advisors is rethinking the M&A advisory business model to bring maximum value to its clients. With its hourly billing model, the firm is delivering more at a lower cost, causing a widespread rethink in the M&A space.

Sale Price, Flat Percentages, and Getting the Deal Done: Traditional Success-Fee Model vs. Hourly Model

Traditionally, M&A advisors have been steadfastly committed to the success fee model, in which they earn a percentage of the transaction value upon completion. The model has dominated investment banking for decades, and while the structure motivates advisors to pursue closed deals, it can also lead to rushed deal closures and a lack of prioritization of client needs or goals. 

“Within the traditional model, the advisor’s interests and the interests of the client in the middle market are often not fully aligned,” says Jung. “There is a gravitational pull to close deals quickly and get paid, rather than putting in the extra time and effort to maximize the outcome.”

In contrast, an hourly fee model drives the M&A advisor to optimize for many aspects of the deal beyond headline valuation. “We focus on minimizing taxes, making sure the earn-out is attainable, and negotiating the price of the rolled equity. None of these impact the success fee,” explains Jung, “but all of these require additional time and effort.” 

While the success fee model is often portrayed as aligning incentives between the investment banker and the seller, larger deals with higher fees are often prioritized, leaving clients with smaller deals feeling left out or completely ignored. “The hourly model opens the door for fairness and deal scalability,” explains Jung. “One hour of work on a $5 million deal is the same as one hour on a $100 million deal.”  

Transparency and Alignment When Selling Your Business

One aspect of the hourly fee structure that attracts clients is the transparency of the approach. The structure eliminates hidden costs, allowing clients to see exactly what they are paying for from the very outset of negotiations and creation of the deal. 

“This transparency builds trust,” says Jung. “Founders are aware of what they are paying for, why they are paying for it, and when. It brings ultimate accountability because we can be fired at any moment, and there is no “fee tail period” to protect us. ”

Seller Benefits and Incentives With Hourly Fee-Based M&A Advisory Firms

The hourly fee model can be especially beneficial to startups and smaller ventures that are often overlooked by larger advisory firms, which tend to focus on the success fee model. For example, if a founder is seeking a buyer for a $4 million technology business, they may face a fee percentage upwards of 10%, which can be a hard pill to swallow for a small business owner. Many reputable investment banks have minimum fees of $1 million or more. Costs can be significantly reduced when seeking out an advisor who follows the hourly fee model like Embarc, with more money staying with the founder once the deal is closed. 

Advisors who follow the hourly fee model can often provide more in-depth, end-to-end support than success-model advisors because they don’t have a rushed closure as their end goal. From buyer outreach through negotiations, the hourly fee model means founders and other clients only pay for the work being done, allowing them to move forward without fear of exorbitant costs.

“We want to provide something to founders who don’t want to lose the hard-earned equity that they have in what they built,” Jung explains. “With the hourly-fee model, every hour spent working on the merger or acquisition moves the needle toward a successful outcome.”

The Downside of the Hourly Fee Model

However, the hourly fee model is not without its faults. As Jung explains, there is a risk that a company expends significant funds and fails to sell. 

“A professional services firm’s reputation is its lifeblood. We assess companies before taking on a mandate to ensure we are confident that we can successfully sell the business. Once we take on a mandate, we do everything in our power to achieve the goals of the client. That’s why we have such a high deal close rate,” says Jung. “It is also worth noting that when a deal is done, the total fees are a fraction of a traditional investment banking fee, so there is a risk-return trade-off.”

Rethinking the Success Fee Model in M&A

Although the success fee model is deeply entrenched in the M&A industry, so much so that it is viewed as the industry standard, it may be time to reevaluate whether clients are being best served with this approach. 

“The market may be overdue for change,” Jung opines. “Many owners and founders forgo hiring an M&A advisory firm because of the high fees. On many occasions, they already know who the buyers are and feel like it’s not worth it. With the hourly-fee model, clients can limit their costs and still get the advice they need to maximize value, minimize taxes, and enhance the overall structure of the deal.”

The clarity, efficiency, equity, competitive costs, and overall support that the hourly-fee model brings to the table are being recognized by more firms seeking to give individualized and fair service to their clients.

It’s a new era for M&A, one that recognizes that a one-size-fits-all, cut-throat approach to pricing may not be in the best interest of all stakeholders. By reconsidering the traditional fee models that the industry has adhered to for so long, advisors like Embarc can foster better relationships with their clients and have a longer-lasting impact on the industry overall.

Disclaimer: The information provided in this article is for general informational purposes only and should not be construed as professional advice. Readers are advised to seek professional counsel before making any decisions based on the content.