At some point in every entrepreneur’s journey, the time comes to consider selling the business they’ve built. It’s never an easy decision especially because it’s often the biggest financial transaction of your life.
Because the stakes are so high, it’s smart to solicit high-quality advice and hire partners who can guide you through the process. One of the most critical partners will be your investment banker. They help you package your deal, market it to buyers, and negotiate the sale.
But before you sign a contract, you need to understand and negotiate two essential elements: Commission and Tail clauses.
Why Hiring the Right Investment Banker Matters
An experienced business sale advisor can dramatically impact the success of your exit. A good investment banker not only finds buyers but also negotiates favorable terms and ensures a smooth closing. However, the wrong banker or the wrong contract terms can create costly headaches.
This is why understanding what to negotiate is crucial before finalizing your agreement.
Two Critical Terms You Must Negotiate with an Investment Banker
- Commission and Incentive Structure
- Understanding the “Tail” Clause
1. Commission and Incentive Structure
You might assume there’s a standard investment banker commission, but there isn’t. Every deal is different.
The most common model is the Lehman Formula (or Lehman Scale), which traditionally sets the commission like this:
- 5% on the first $1 million of the transaction value
- 4% on the second $1 million
- 3% on the third $1 million
- 2% on the fourth $1 million
- 1% on the amount above $4 million
When negotiating, your goal should be to find a balance: incentivize your banker to secure the best price without overpaying.
Structuring Incentives for a Higher Sale Price
In addition to a base commission, consider adding an incentive bonus. For example:
If the banker secures a price above $50 million, they earn an additional 1%–1.5% bonus.
This motivates the banker to maximize your valuation, aligning their goals with yours.
2. Understanding the “Tail” Clause
Another vital term is the exclusivity “tail”.
The tail defines how long after terminating your agreement the banker is still entitled to a commission if a sale closes with a buyer they originally contacted.
Example:
- You part ways with a banker on January 1.
- On June 1, a buyer they had previously introduced approaches you to buy the company.
- If you close the sale, you still owe the original banker their full commission.
Tails can last 12–18 months—sometimes longer. And they can severely restrict your ability to engage new advisors or close future deals without double-paying commissions.
Real-World Cautionary Tale
I worked with a company in the instrumentation and control sector that hired the wrong banker. Due to a lengthy tail clause, they couldn’t re-enter the market for nearly two years without risking multiple commission payments. It stalled their entire exit strategy.
Smart Strategies for Negotiating Your Investment Banker Contract
Before signing:
- Negotiate down the tail period—preferably under 12 months.
- Specify exclusions: If you were already in talks with certain buyers before hiring the banker, exclude them from the contract or negotiate reduced commissions if deals happen.
- Align incentives: Ensure your banker is motivated to achieve the highest valuation, not just any quick sale.
Attention to detail now can save you from costly problems later.
Final Thoughts: Protecting Your Interests When Selling Your Business
When you reach the point of selling your business, choosing the right investment banker is crucial. But negotiating the right contract terms especially around commission and the tail is equally important.
By aligning incentives and protecting yourself with smart contract negotiations, you’ll set yourself up for a successful and lucrative business exit.
