Why Transaction-Contingent Fees Are the Wrong Model for Attorney-Run Sales

The fee changes the question the firm's counsel has to answer

A firm that charges hourly or fixed fees for organizing a client's sale process has one set of regulatory questions to put to its own counsel. A firm that charges a percentage of the purchase price has a different fact pattern. Compensation tied to a transaction can be relevant to the broker-dealer analysis, but the answer depends on the activities, transaction structure, parties, and jurisdiction. The SEC's 2014 no-action letter described a narrow, fact-specific set of conditions for an M&A broker and expressly said different facts could produce a different conclusion. The letter was withdrawn in 2023, so it is historical context rather than a current safe harbor. [1]

This article does not reach a conclusion on where any firm's activities fall. That is for the firm and its own counsel. A firm considering a process practice should ask counsel, before the first engagement, how the federal M&A broker exemption and the rules of each state in which it practices apply to the activities it will perform and the fees it will charge. The answer may differ if the fee is contingent, and a firm that has not asked should not assume.

Keeping the fee tied to work also makes the engagement conversation easier. The engagement letter can state that the firm's fee is for specified services and does not depend on whether a transaction occurs or on its terms, subject to the firm's own review of applicable professional rules. That is a clearer starting point than trying to describe a success fee as though it were ordinary legal billing.

The fee changes what advice the attorney can give cleanly

The most valuable advice an attorney gives during a sale is often the advice to slow down, walk away, or hold out. A buyer's LOI arrives with a price that is acceptable but a structure that shifts risk to the seller through a large earnout and a thin escrow. The attorney's job is to explain that trade and, where the alternatives support it, recommend that the client push back or wait for the second bidder.

An attorney paid a percentage of the purchase price at closing has a financial interest in the deal closing and in the headline number. That does not prove the attorney will give bad advice, and the ABA Model Rules expressly recognize that a reasonable contingent fee may be permitted in a civil case. But the arrangement can create a conflict question that must be addressed under the rules governing the lawyer and the matter. [2] The client also knows the fee structure, so a recommendation to take the deal now may carry an asterisk. A fee earned by work, paid whether or not the deal closes, reduces that particular pressure.

The same logic applies across the process. Whether to disclose a customer concentration problem early or late, whether to include a competitor on the buyer list, and whether to extend an exclusivity period that has expired are judgment calls where the client's interest and the closing of the transaction can diverge. The attorney should be free to make each call on the merits.

The fee changes how the client reads the relationship

Business owners who have been through a banker-led sale may perceive a shift in the relationship after an LOI is signed. The banker may appear more focused on preserving a closing than on revisiting the process. That perception can arise from the incentive, from the owner's expectations, or from both. It is not a claim that every banker behaves the same way.

An M&A attorney's advantage with an owner client is trust accumulated over years of corporate work. The owner has watched the attorney say no to things, bill for time, and give advice that cost the firm fees in the short run. A transaction-contingent fee can spend some of that trust. It tells the owner that for this one matter, the attorney has an incentive tied to the outcome. Even if the attorney's conduct does not change, the owner's reading of it may.

Keeping the fee tied to work preserves the posture the owner already values. The attorney is the advisor who is paid for the agreed services whether the answer is sell to this buyer, wait for a better one, or do not sell. That posture is one reason an owner may call the attorney first.

What the firm gives up, and what it gets instead

The obvious objection is economic. A banker's fee on a $40 million transaction can be a large number. A phased fee schedule for the same client is usually a smaller one. The firm appears to leave money on the table.

The first comparison should be with the firm's documents-only engagement for the same client, not with a banker's fee. Against that baseline, a process engagement represents a larger scope of work: preparation, valuation support, marketing materials, buyer-list work, offer comparison, diligence coordination, and negotiation through closing. The firm can price those phases according to the work and the staffing required, including work on a process that does not close. That is an economic model, not a claim that every engagement will produce a particular revenue result.

There is also a capacity point. A contingent model can make the largest transactions look most attractive because the percentage rises with transaction value. A fee-for-services model can let the firm decide whether to serve an owner with $3 million of EBITDA as well as an owner with $15 million, because the fee reflects the work rather than only the size of the transaction. Those figures are illustrative, not measured results. A partner can test the model this week by listing the phases, responsible timekeepers, review points, and fixed or hourly fee for a current client.

Telling a client why the fee is not contingent

Owners sometimes propose the contingent structure themselves. Just take a percentage when it closes sounds like alignment to a seller who has heard that bankers work that way. The response can be short: the firm's fee is for work performed, the firm will not be paid more because the price is higher, and the firm wants its recommendations evaluated on the client's objectives rather than on the prospect of a closing. The firm should confirm the wording with its own counsel and applicable professional rules.

A partner can put the explanation in the engagement letter. It can identify the services, the phases, the billing basis, and what happens if the client pauses or ends the process. It can also state that the attorney and the client make the decisions and that software, if used, only prepares, organizes, matches, and tracks information. The attorney and the client decide and act. This keeps the technology's role separate from legal advice, buyer contact, negotiation, and the firm's compensation.

The practical test is whether the client can understand the economics before the first teaser goes out. If the client knows what the firm is paid for, what work is included, and whether payment is due if the process stops, the fee is less likely to become a source of confusion during offers, exclusivity, diligence, or the purchase agreement.

How Acquivo Pro fits

Acquivo Pro is the firm edition of Acquivo for M&A attorneys and boutique investment banks. Its firm edition uses a flat monthly subscription per seat with no per-deal fees. One seat can run multiple concurrent client processes. The firm and client use the platform to run valuations, generate teasers and CIMs from the questionnaire and data room, build a prospect list using the platform's buyer-matching criteria, and manage NDA, IOI, and LOI flow in one pipeline. The client sees a branded document portal where requests, uploads, and disclosure approvals are handled. Software prepares, organizes, matches, and tracks; the attorney and the client decide and act. To walk through a process on a client you have in mind, request a demo through the Contact page.