How Do Investment Banks Get Paid?

How your investment bank gets paid shouldn’t be a mystery.  As your representative in a transaction, the fee discussion should be had upfront and should be totally transparent as you consider hiring an investment bank.

Investment banks can be paid in several different ways.  The most traditional fee structure is for the banker to be paid a one-time retainer upon engagement and a success fee once a transaction happens.

The retainer is usually small (relative to the size of the potential transaction) and compensates the banker for the initial work that will occur prior to a company being brought to market.  There is considerable work to be done before a sale process and by the time the company is ready to be brought to the market, your investment banker has usually spent more money, time and other resources than the retainer.  As a seller, this is a good situation because your banker is then highly motivated to get a transaction done.  The size of the retainer will depend on a number of things but can increase or decrease based on the likelihood that a transaction will occur.

A success fee is paid when a transaction is complete.  This is usually a percentage of the total transaction amount.  The success fee can be structured as a flat percentage, as a percentage that goes down as the purchase price increases, or as a percentage that goes up as the purchase price increases (usually when you want to incentivize your banker to achieve a minimum price).

Some investment banks will consider offering services a la carte for a fixed price or even an hourly rate, but this is not the norm.