What Is an Engagement Letter?
An engagement letter is a binding contract between a company (the client) and its financial advisor (typically an investment bank, boutique advisory firm, or accounting firm) that establishes the terms under which the advisor will provide services in connection with an M&A transaction. The engagement letter defines the scope of work, fee structure, duration, exclusivity provisions, and the legal relationship between the parties.
The engagement letter is the foundational document of the advisory relationship — it determines the advisor’s role, compensation, and obligations throughout the deal process.
Key Components
Scope of Services
| Service | Description |
|---|---|
| Sell-side advisory | Manage the sale process, prepare offering memorandum, solicit buyers, negotiate terms |
| Buy-side advisory | Identify targets, conduct valuation analysis, negotiate acquisition terms |
| Fairness opinion | Independent opinion on the fairness of the transaction price |
| Restructuring advisory | Advise on restructuring alternatives, negotiate with creditors |
| Capital raising | Arrange debt or equity financing for the transaction |
Fee Structure
| Fee Type | Description | Typical Amount |
|---|---|---|
| Retainer | Monthly fee for ongoing advisory services | $25,000 - $150,000/month |
| Success fee (transaction fee) | Paid upon closing of the transaction | 1-3% of deal value (larger deals); Lehman or double Lehman formula (smaller deals) |
| Minimum fee | Guaranteed minimum regardless of deal size | $500,000 - $5 million |
| Fairness opinion fee | Separate fee for delivering a fairness opinion | $500,000 - $2 million |
| Expense reimbursement | Advisory firm’s out-of-pocket expenses | At cost (capped or uncapped) |
Fee Formulas
Modified Lehman Formula (common in mid-market):
- 2% of first $10 million of transaction value
- 1.5% of next $10 million
- 1% of amounts above $20 million
Double Lehman (common in lower mid-market):
- Double the percentages above
Duration and Termination
| Term | Typical Provision |
|---|---|
| Initial term | 6-12 months |
| Renewal | Automatic renewal for successive 3-6 month periods |
| Termination for convenience | Either party with 30-60 days’ notice |
| Tail period | Success fee payable if transaction closes within 12-24 months of termination with a buyer introduced during the engagement |
Negotiation Points
Key Issues for the Client
- Exclusivity — can the client engage another advisor simultaneously?
- Tail provision — how long after termination does the advisor retain fee rights?
- Buyer universe — which potential buyers trigger the success fee?
- Fee caps — maximum fees payable regardless of deal size
- Conflict waivers — advisor’s relationships with potential buyers
Key Issues for the Advisor
- Minimum fee — guaranteed compensation regardless of outcome
- Broad definition of transaction — ensure the success fee covers all deal structures (merger, asset sale, joint venture, recapitalisation)
- Tail protection — protect fee entitlement if the client terminates to avoid paying the success fee
According to the Association for Corporate Growth, engagement letters in mid-market M&A typically feature success fees of 2-5% of transaction value, with the percentage decreasing as deal size increases.
APAC Context
Australia — engagement letters in Australian M&A follow international standards, with fees typically quoted in Australian dollars. For ASX-listed company transactions, the engagement letter may need to address the advisor’s role in the scheme of arrangement process, including preparation of the independent expert’s report.
Japan — engagement letters for Japanese M&A advisory mandates require careful attention to the scope of services, as the advisory role in Japan often includes more hands-on involvement in the deal process than in Western markets. Fee structures may include both yen-denominated retainers and USD-denominated success fees for cross-border transactions.
India — engagement letters in India must consider SEBI regulations for registered merchant bankers providing advisory services in listed company transactions. Fee arrangements must comply with the Companies Act provisions regarding related-party transactions if the advisor has a relationship with the client.
“The engagement letter sets the foundation for the entire advisory relationship — getting the terms right at the outset prevents disputes and misalignment later,” notes Daniel Bae, founder of Amafi. “In APAC, where advisory mandates often span multiple jurisdictions, engagement letters must clearly define the scope and fee allocation across borders.”
Engaging advisors for M&A across Asia Pacific? Amafi helps companies and investors find and structure advisory relationships for deal processes. Learn more.