Thomas Sonntag

The absurdity of the success fee

In comparison to some of our competitors, we do not only work on the basis of a success fee, instead, we work with a model based on monthly fees (retainers) and a final success fee.

Why do we do this? This article contains some good arguments for a combined remuneration on the basis of retainers and success fee.

Let’s assume we would agree to work on the basis of a pure success fee:  You envisage a company value of EUR 10 million and we agree on a success fee of 5%.

That should be a motivating incentive for the consultant! So what is going to happen?

Imagine, you and the buyer are in the process of negotiations, the purchase price of 10 million euros is largely fixed.  The M&A consultant is looking at a relatively safe EUR 500,000 deal (5% of EUR 10 million). He feels however, that a purchase price of EUR 12 million would also be possible. What would you do if you were in his shoes?

Risk the deal – and you have to in order to achieve optimum conditions – in order to get an additional fee of EUR 100,000? Why would the consultant do that? A consultant working only on the basis of success will focus on the “secure” fee and will push you to accept the 10 million euro purchase price.

He will continue to “advise” you to close the deal – even if he knows that the contractual terms could be considerably more favourable for you.

This is why we see more and more businesspeople that have been pushed into closing a deal. Those who have agreed to a model on the basis of “half of the purchase price after conclusion of the contract and the rest later” have ultimately been left bewildered and empty-handed once the first payment has been made.

Even worse are amateurishly negotiated purchase contracts. Sometimes entirely without any liability restrictions and with seemingly eternal liability periods. Good consultants know what a good purchase contract looks like. But why should they disclose their knowledge and risk losing a deal?

And so the cases increase, in which an entrepreneur receives a supposed attractive purchase price, but cannot keep it, as a “bad” purchase contract can be used by the buyer to get all of his money back whenever he wants.

We could go on and on with such stories. They are a dime a dozen. So how can you recognise sound consulting methods?

By the fact that the consultant will provide advice in your interest, even if it contradicts his own personal interests. He must be able to risk the deal at any time in order to obtain the best conditions for you. And in the event of doubt, he should be able to advise you to refrain from a deal if he feels you have not received an optimum offer.

This is only possible if the consultant does not solely work on the basis of a success fee.