Negotiating Investment Banking M&A Engagement Letters: Keeping the Investment Bank Incentivized While Protecting Your Interests

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Congratulations … we hope. Your company has battled through the past several years of troubled economic times and has come out on the other side stronger for it. Cautious investors who have been hoarding their cash are slowly testing the investment waters, and a flurry of investment bankers are rummaging through the remnants looking for the diamond in the rough that entices some of this sidelined money back into the markets. One of the wiser investment bankers now remembered a distant meeting with you and has realized, rightfully so, that your company’s recent EBITDA growth and margin expansion make you a very appealing candidate to a potential buyer. The investment banker has approached your company, laid out a compelling case for why a sale at this time might make sense for your company, and has convinced you to plant a “for sale” sign in your corporate offices and test the market. The investment banker has served up his firm’s “standard engagement letter,” and asked that you sign it so you can partner up and kick off the process.

At this point you are conflicted — you know this investment banker is supposed to be “on your side” and “working for you” and you certainly do not want to start the relationship on the wrong foot. At the same time, there are a number of provisions in the engagement letter that make you uneasy, and you wonder whether they are customary or if there is room for negotiation. Beyond some of the obvious negotiable points (such as the amount of the success fee), we highlight below several aspects of the engagement letter that should be evaluated with care and that have room for negotiation.

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