Engagement Letter

An engagement letter is the agreement between an M&A advisor and their client and the contractual basis of every mandate. It sets out scope of work, exclusivity, term, compensation from retainer and success fee, expenses, liability caps and confidentiality. Two clauses matter most economically: the definition of transaction value on which the success fee is calculated, and the tail clause under which the fee is still payable if a deal closes after the mandate ends with a buyer the advisor introduced. On transaction value, the decisive points are whether the fee is based on equity price or on enterprise value including assumed debt, and whether contingent or deferred elements of the price are included. The same transaction can therefore produce very different fees.

Tiered rates are common, with the percentage falling as value rises, supplemented by a minimum fee and often by a higher rate above an agreed target valuation, creating an incentive for an outstanding result. It should also be settled whether the ongoing retainer is credited against the success fee, which expenses are reimbursable and whether a fee is payable if the process is abandoned. M&A advisory in Germany has no specific statutory fee schedule. Fees and tail periods are therefore agreed contractually. Liability caps are also negotiated but remain subject to legal restrictions.

For a seller this document determines actual transaction costs long before the purchase price is discussed. Besides the terms, the staffing of the mandate is essential when choosing an advisor, because in many firms origination is done by experienced partners and execution by junior staff. An express provision on who actually leads the mandate is therefore advisable. Termination rights during the term should also be settled, as should which documents and contacts remain with the client on termination, so that a later process does not have to start from scratch.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.