Engagement Letter

An engagement letter is the formal written agreement between a business owner and an M&A advisor or business broker that governs the advisory mandate. It defines the scope of services, the fee structure, the duration of the engagement, exclusivity, and the conditions under which fees are earned and payable.

A sell-side engagement letter typically covers: the success fee formula (often a Lehman Formula percentage or fixed rate applied to the total transaction value); whether a retainer is payable upfront and how it is credited against the success fee at closing; the term of the engagement (typically 12–18 months); a tail period — usually 12–24 months after termination — during which the advisor remains entitled to a fee if the business is sold to any buyer introduced or contacted during the engagement; and any carve-outs for buyers the owner has already been in contact with independently.

The tail clause and the definition of a "transaction" that triggers the fee deserve particular attention. Some engagement letters define "transaction" broadly enough to include financing events, minority investments, or management buyouts, not just outright sales. The fee tail means that terminating an engagement does not immediately free the seller from fee obligations. Reading the engagement letter carefully — and negotiating its terms before signing — can avoid disputes at the worst possible moment, which is closing.

See also: Success Fee, Retainer, Lehman Formula, Letter of Intent.