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- Mastering Off-Market Deals: How Finder's Fees Can Fill Your Pipeline and Boost Your Bottom Line
Mastering Off-Market Deals: How Finder's Fees Can Fill Your Pipeline and Boost Your Bottom Line
Matt Bodnar
August 08, 2024
Unlock the Potential of Off-Market Deals
In the ever-competitive world of lower middle market private equity, discovering off-market deals can be a game changer. As an experienced buyer navigating this wild west, I've uncovered countless opportunities that weren't right for me but could be perfect for other private equity buyers. This is where the concept of finder’s fees comes into play—a potent tool that can not only fill your deal pipeline but also generate substantial income.
The Power of Finder’s Fees
Imagine having a small army of individuals out there, scouring the market for deals that fit your criteria. That's exactly what I have, and I pay them finder’s fees for bringing these opportunities to my attention. Conversely, when I encounter deals that don't match my investment strategy, I refer them to other buyers and earn a finder’s fee myself.
You might be wondering, "What are market rate finder’s fees?" Great question. Here's the breakdown:
Typical Finder’s Fee Rates
In private equity, finder’s fees are almost always paid on a contingency basis. This means the fee is only paid if the deal actually closes—no upfront costs. These fees generally range from 1-2% on the lower end to 5% on the higher end, depending on various factors such as:
Level of engagement of the referring party
Quality of the deal
Size of the deal
Complexity and specifics of the transaction
It's also common to see a minimum fee structure. For instance, you might encounter a 1.5% fee with a $25,000 minimum.
The Lehman Scale
Another prevalent method is the Lehman Scale, which adjusts the fee based on the size of the deal. The structure typically looks like this:
5% of the first $1 million
4% of the second $1 million
3% of the third $1 million
2% of the fourth $1 million
1% of the fifth $1 million
For example, on a $7 million deal, a Lehman Scale referral fee would be calculated as follows:
5% of $1 million = $50,000
4% of $1 million = $40,000
3% of $1 million = $30,000
2% of $1 million = $20,000
1% of $3 million = $30,000
Total: $170,000
Why Finder’s Fees Work
The lucrative potential of finder’s fees makes it a compelling strategy to encourage your network to send you off-market deals. By offering a financial incentive, you can tap into a broader range of opportunities that might not make it to the open market.
Your Next Steps
So, how do you get started? Here are some actionable steps:
Build Your Network: Connect with industry professionals who are likely to come across off-market deals.
Establish Clear Terms: Clearly outline the finder’s fee structure and ensure all parties understand the contingency basis.
Offer Competitive Rates: Make your finder’s fees attractive enough to motivate potential referrers.
Stay Active: Continuously engage with your network to remind them of the potential rewards for sending deals your way.
Conclusion
Off-market deals and finder’s fees can be incredibly advantageous for savvy investors and business owners. By leveraging these strategies, you can not only enhance your deal flow but also create additional revenue streams.
Got a deal to send my way? I'd love to hear about it! Let’s make the most of these opportunities together. In the meantime, stay tuned for the next edition of Deal Mastery Insider.
-Matt
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