Why Success Fees Are the Wrong Base for M&A Advisory Debt

A revenue-based financing provider prices its offer against trailing revenue, and a firm whose revenue mix includes large, infrequent success fees will show a lumpy, unpredictable pattern that's hard to model even when the underlying advisory work is steady. Worse, a provider that does price against a period that happened to include a large success fee will size the offer too aggressively, leaving your firm exposed if the next comparable deal takes longer to close or doesn't close at all. Separate your reported revenue into retainer and monthly advisory fees versus contingent success fees before you approach any lender, and lead with the former.

A firm with a base of monthly retained advisory clients, ongoing strategy work, board advisory relationships, ongoing diligence support retainers, has a revenue floor that exists independent of any single deal closing, and that floor is what should size any debt payment you take on. An SBA 7(a) loan underwritten against that steadier base, with success fees treated as an accelerant toward faster payoff rather than a required input, can give you a repayment schedule you can meet in a quarter where every deal in the pipeline slips.

An SBA loan works well for financing a fixed, one-time need, buying out a departing partner, financing a data room or diligence tooling platform, or working capital to carry deal-team staffing through a due diligence process that runs longer than the original engagement letter assumed. SBA 7(a) rates scale with how much you borrow, running lower on larger loans and higher on smaller ones¹, and for most firms this prices well below what a revenue-based structure would cost across a comparable term.

A firm with a genuinely steady retainer base, where success fees are a smaller share of total revenue rather than the majority of it, is a more realistic fit for a revenue-based structure than one relying heavily on deal-contingent income. If success fees make up most of your firm's revenue in a typical year, expect a revenue-based provider to either decline or price conservatively, and lean toward an SBA loan or a line of credit sized against your retained work instead.

Say your firm staffed three associates against a deal expected to close and pay a success fee in the second quarter, but the buyer's own financing fell through and the deal didn't close until the fourth quarter, at a smaller fee than originally modeled. A revolving line of credit, sized against your retainer base and drawn to cover the associates' payroll through the extra two quarters, absorbs that slip without forcing a staffing cut or a scramble; a revenue-based facility that had been priced assuming the original Q2 fee would have left you short exactly when the deal stalled.

It's natural to staff a deal team based on the engagement's expected timeline, but committing to new hires or a larger team specifically because a success fee is expected soon is one of the more common ways a firm overextends itself. Staff against your confirmed retainer and monthly work first, and treat a deal team ramp as something you can scale back if the deal's timeline moves, rather than a fixed commitment made on the strength of a fee that hasn't been earned yet.

Keep deal-team staffing safe with these habits:

• Staff against confirmed retainer and monthly work first, before adding people for an expected success fee.
• Treat a deal-team ramp as something you can scale back if the deal's timeline moves.
• Do not count a signed letter of intent as revenue a lender should rely on, since many fall apart before closing.
• Size any debt payment against your retainer floor, so it is covered without assuming a success fee closes on schedule.

A conventional bank line of credit, rather than an SBA product or a revenue-based facility, is worth quoting for firms with an established banking relationship and a strong retainer base, since average small-business borrowing rates span a wide range depending on the lender and your credit history². A firm with several years of consistent retainer revenue and a clean payment history may find a conventional line prices competitively against an SBA option, particularly for a smaller facility where the fixed costs of SBA paperwork and closing can add proportionally more to the total cost.