Why Bankers Push Deals That Are Wrong for You
Your investment banker is smart, experienced, and working hard on your deal. They're also operating under incentives that don't perfectly align with yours. Understanding these incentives helps you get better advice—or at least filter the advice you receive.
Key Takeaways
- •Bankers get paid to close deals, not to get you the best deal or to walk away
- •Success fees create pressure to close even when you should wait or renegotiate
- •The banker's marginal economics differ from yours—an extra $1M matters more to you
- •Good bankers overcome these incentives, but you should understand them regardless
Investment bankers play a valuable role in M&A transactions. They run the process, find buyers, negotiate terms, and manage complexity. But they're not disinterested advisors—they're paid based on outcomes that sometimes conflict with your best interests. The more you understand their incentives, the better you can work with them.
This isn't about good or bad bankers. It's about incentive structures that affect behavior—even for the best-intentioned professionals.
How Bankers Get Paid
Most investment bankers work on a success fee basis—they get paid when (and only when) a deal closes. The typical structure:
- Retainer: A modest monthly fee ($10-50K) that covers basic costs but doesn't drive real compensation
- Success fee: A percentage of deal value (typically 1-5%) paid only on closing
- Minimum fee: A floor on the success fee (often $500K-$2M) regardless of deal size
Example Fee Calculation
Deal value: $30M
Fee rate: 2.5%
Success fee: $750,000
The banker's $750K fee depends entirely on closing. Nine months of work with no close = no fee (beyond the modest retainer). This creates obvious pressure to get deals done.
Where Incentives Misalign
1. Close vs. Walk Away
You might have a deal that's "okay"—not great, but acceptable. The banker strongly encourages you to close. Why? For them, the choice is between getting paid (close) and not getting paid (walk). For you, the choice is between an okay outcome and potentially a better outcome later. Their urgency doesn't match yours.
2. Marginal Dollar Economics
Fighting for an extra $1M on a $30M deal is worth $1M to you. At a 2.5% fee rate, it's worth $25K to your banker. The banker's rational advice: "Don't risk the deal over $1M." Your rational analysis: "$1M is worth fighting for." You're both right, from your own perspectives.
| Negotiation Item | Value to You | Value to Banker (2.5%) |
|---|---|---|
| $1M more on price | $1,000,000 | $25,000 |
| Better escrow terms | $300,000 (risk-adjusted) | $0 |
| Earnout reduction | $500,000 (risk-adjusted) | ~$12,500 |
| Working capital target | $200,000 | $5,000 |
3. Speed vs. Optimization
A banker with multiple deals prefers to close each one quickly and move on. Spending an extra month optimizing your deal terms has an opportunity cost—they could be working on another transaction. You want your deal optimized; they want it closed.
4. Process vs. Outcome
Bankers get paid for closing deals, period. They don't get paid more for finding you the perfect strategic fit, ensuring cultural alignment, or securing terms that work well post-close. A closed deal with a difficult buyer still generates a fee.
The Sunk Cost Pressure
After six months of work, your banker has significant sunk costs. Their advice becomes colored by the desire to see a return on that investment. "We've come this far" is true for them in a way it isn't for you—their time is gone regardless, but their fee depends on closing.
When to Watch for Misalignment
Late-Stage Price Reduction
The buyer comes back after due diligence with a price reduction. Your banker says: "It's still a good deal—we should take it." They may be right, but they're also motivated by closing. Question whether you should renegotiate harder, extend the timeline, or walk away.
Accepting First Serious Offer
A credible buyer shows up with a reasonable offer. The banker recommends proceeding. But are there other buyers who might pay more? Does this buyer have weaknesses you could exploit in negotiation? A banker's enthusiasm for the "bird in hand" may exceed yours.
Deal Structure Trade-offs
Earnouts, escrows, working capital adjustments, indemnification provisions—these affect your real proceeds but may not affect the banker's headline fee. Watch for advice that protects the topline number (which drives fees) while compromising the details (which affect you).
Timeline Pressure
"We need to move quickly or we'll lose the buyer." Sometimes true, sometimes banker urgency. Question whether the timeline pressure is real or manufactured. Buyers rarely walk from good deals over reasonable timing.
Working Effectively with Your Banker
1. Understand the Incentives
Just knowing about these dynamics helps. When your banker recommends closing, ask yourself: "Would they give this advice if they got paid the same either way?" If the answer is unclear, dig deeper.
2. Get Independent Perspective
Have advisors who aren't paid on the deal—your attorney, your accountant, a CFO advisor—provide perspective on key decisions. They can evaluate recommendations without the success-fee lens.
3. Negotiate Fee Structure Thoughtfully
Consider fee structures that better align incentives:
- Tiered fees that increase with deal value (stronger incentive to maximize price)
- Minimum acceptable price below which no fee is paid
- Fees that account for deal structure, not just headline price
4. Maintain Walk-Away Power
The best negotiations happen when you can genuinely walk away. If you've mentally committed to selling, you lose leverage. Maintain real optionality, and your banker's "you should close" advice carries less weight.
5. Choose the Right Banker
The best bankers overcome these incentive problems through professionalism and reputation concerns. They know that screwing clients for short-term fees destroys long-term value. Seek bankers with strong reputations, happy past clients, and demonstrated willingness to walk from bad deals.
References Matter
Talk to previous clients—not the banker's reference list, but people you find independently who've worked with them. Ask specifically: "Did they ever advise you to walk from a deal or push back hard on a buyer?" Bankers who do this are the ones whose interests align most closely with yours.
The Bottom Line
Investment bankers add value—they know buyers, run processes efficiently, and often achieve better outcomes than sellers could alone. But they're not neutral advisors. Their success fee structure creates predictable biases toward closing deals, moving quickly, and not fighting for marginal improvements.
Understanding these incentives doesn't mean mistrusting your banker. It means being an informed client who can evaluate advice critically, push back when appropriate, and ensure that the deal that gets done is the right deal for you—not just the deal that closes.
Close the Deal
Banker priority: get paid
Maximize Value
Owner priority: best outcome
Build Reputation
Good bankers overcome incentives
Need Independent M&A Perspective?
Eagle Rock CFO provides independent financial analysis for M&A transactions. We're not paid on your deal closing—we're paid to give you unbiased advice. Let us be the voice in your ear that isn't influenced by success fees.
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