Tail Provision

A tail provision (sometimes called a tail clause or holdover period) is a term in an engagement letter or listing agreement that entitles the M&A advisor or business broker to a success fee even after the formal engagement has ended, if the business is sold to a buyer who was introduced to or contacted by the advisor during the engagement period.

Tail periods typically run 12–24 months from the date the engagement terminates. Their purpose is to prevent a seller from receiving the benefit of the advisor's marketing work — including introductions to prospective buyers — and then terminating the engagement shortly before a deal closes in order to avoid paying the fee. From the advisor's perspective, a tail provision is a necessary protection for the investment of time and resources made in running a sale process.

For sellers, the tail clause deserves close reading before signing the engagement letter. Key points to negotiate include: the length of the tail period, the definition of a "buyer introduced during the engagement" (whether verbal or formal contact is sufficient), and whether any buyers the seller was already in contact with independently can be carved out. A tail that is too broadly defined can obligate the seller to pay a fee on a sale completed through entirely separate efforts long after the advisor relationship ended. The engagement letter should specify clearly how the buyer list is tracked and documented during the engagement period.

See also: Engagement Letter, Success Fee, Retainer, Letter of Intent.