Quick Answer
The sell-side process begins with a formal engagement letter between the seller and the investment bank covering scope, success fee, indemnification, exclusivity, and a tail provision. The banker then presents a menu of strategic alternatives, including a sale of the entire company, a divestiture, a spinoff, or a split-off, rather than a single recommendation.
Every sell-side mandate starts in two pieces: a contract that defines what the bank gets paid for, and a strategic-alternatives review that puts every realistic path in front of the seller's board.
The Engagement Letter
The engagement letter is the foundation for fee entitlement when a deal closes. Sloppy drafting leads to disputes when the seller and bank disagree on whether a transaction triggered the success fee.
Standard engagement letter terms:
- Scope of services: M&A advisory, often with optional add-ons for fairness opinion, financing arrangement, or post-closing transition support
- Success fee: Typically a percentage of transaction value, structured as either a flat percentage or Lehman-formula tiers (5% on the first $1M, 4% on the second $1M, 3% on the third $1M, 2% on the fourth $1M, 1% on everything above)
- Retainer / monthly fee: A fixed monthly payment credited against the success fee at closing
- Expense reimbursement: Out-of-pocket costs (travel, third-party data subscriptions, outside counsel) reimbursed by the seller
- Indemnification: Seller indemnifies the bank against third-party claims arising from the engagement, subject to standard carve-outs for the bank's gross negligence or willful misconduct
- Exclusivity: The bank is the exclusive financial advisor for the seller during the engagement, typically a 12-24 month period
- Tail provision: The bank still earns its success fee if a deal closes with a contacted party within a defined window (often 12-24 months) after the engagement terminates
- Fairness-opinion fee: A separate fixed fee paid when a fairness opinion is delivered, structured to be independent of whether the deal closes
Exam Tip: Gotchas
- The tail provision survives termination of the engagement. A seller that "fires" the banker mid-process and then closes with a buyer the bank introduced still owes the success fee inside the tail window.
- Indemnification flows one way. The seller indemnifies the bank, not the reverse. This is industry-standard for advisory engagements and reflects that the bank's product is advice, not a manufactured good.
Review of Potential Transaction Alternatives
The banker's first deliverable to the seller's board is a menu of strategic options, not a single recommendation. The board's job is to evaluate which structure maximizes value; the banker's job is to lay the choices out cleanly.
The review covers:
- Potential transaction structures: The different sale variants in the table below, plus alternatives such as a leveraged dividend recapitalization (stay independent, distribute cash) or an initial public offering of a subsidiary (carve-out)
- Market environment: Current M&A multiples in the seller's sector, recent comparable transactions, equity-market receptivity to IPOs, debt-market capacity for leveraged buyouts (LBOs)
- Regulatory environment: Antitrust exposure, foreign-investment review under the Committee on Foreign Investment in the United States (CFIUS), industry-specific approvals (banking, telecom, defense)
- Tax environment: Corporate income tax rates, dividend tax rates, capital gains rates, the availability of tax-free reorganizations for specific sale variants
Identification of Potential Transactions (Sale Variants)
The banker maps each sale variant to what is being sold, who the buyer is, and what the result looks like for the parent.
| Variant | What's Being Sold | Buyer Profile | Result |
|---|---|---|---|
| Sale of entire company | 100% of the equity or assets | Strategic acquirer or financial sponsor | Seller's shareholders cash out (cash deal) or receive acquirer stock (stock deal) |
| Divestiture | A division, business unit, or subsidiary | Strategic or financial buyer | Parent retains the rest of the business; cash proceeds at parent level |
| Spinoff | Subsidiary distributed to parent's shareholders pro rata | None; shareholders receive shares of newly independent SpinCo | Two separate public companies; no cash changes hands; potentially tax-free under the corporate-separations provision |
| Split-off | Subsidiary shares exchanged for parent shares | None; only parent shareholders who tender their parent stock receive SpinCo shares | Functions like a tax-free buyback; parent's share count shrinks |
| Reverse Morris Trust | Parent spins off subsidiary which then merges with a third-party acquirer | Pre-arranged third-party acquirer | Spun subsidiary's shareholders (former parent shareholders) own >50% of the merged entity; tax-free if the 50.1% retention test is met |
| Equity carve-out | Parent IPOs a minority stake of subsidiary | Public investors | Parent retains majority ownership; public investors buy a minority interest in the subsidiary |
Think of it this way: a spinoff is a pro-rata distribution to every parent shareholder, just like a stock dividend, except the dividend is shares of a new company. A split-off lets shareholders choose: keep parent stock or swap it for SpinCo stock. The split-off behaves like a tax-free buyback because parent shares come out of circulation. A carve-out is an IPO of a slice of the subsidiary, leaving the parent with the controlling stake.
Exam Tip: Gotchas
- Spinoff is pro rata to ALL shareholders. Split-off lets shareholders choose. A split-off shrinks the parent's share count; a spinoff does not. Both can be tax-free under the corporate-separations provision (covered in the tax-coordination section); a divestiture is generally taxable at the parent.
- The seller's banker must identify ALL realistic structural alternatives, not just "sell the company." A spinoff or split-off may unlock more value than an outright sale when the unit trades at a different multiple than the parent, or when antitrust would block a strategic sale of the unit.
- An equity carve-out is not a sale variant in the sense of the others. The parent retains majority ownership and uses the carve-out as a price-discovery event or a financing step, not as an exit.