Writing Engagement Letters

Writing Engagement Letters

Structures investment banking engagement terms with scope, fees, indemnification, and tail provisions.

When To Use

• Drafting a new sell-side or buy-side advisory engagement letter
• Documenting a fairness opinion, valuation, or capital-raising mandate
• Negotiating or revising fee structures (retainer, success fee, incentive tiers)
• Memorializing scope changes or amendments to an existing engagement
• Preparing engagement terms for a restructuring, recapitalization, or strategic alternatives review

Inputs To Gather

• Parties: Full legal names of the advisory firm and the client entity, including jurisdiction of incorporation
• Transaction type: Sell-side M&A, buy-side acquisition, fairness opinion, capital raise (debt/equity), restructuring, or other advisory mandate
• Scope of services: Specific deliverables (e.g., marketing materials, management presentations, buyer outreach, negotiation support, fairness opinion delivery)
• Fee structure: Retainer amount and payment schedule, success/transaction fee formula (flat, Lehman-scale, tiered percentage, minimum fee), and any fee crediting provisions
• Tail period: Duration (typically 12–24 months) and which counterparties or transactions are covered post-termination [VERIFY: tail length norms vary by deal type and market]
• Expense provisions: Cap on reimbursable out-of-pocket expenses, pre-approval thresholds, and categories covered (travel, data rooms, third-party advisors)
• Indemnification terms: Scope of indemnity, standard of exclusion (gross negligence, willful misconduct, bad faith), contribution mechanics, and survival period
• Exclusivity and right to act: Whether the advisor has exclusive mandate and any carve-outs for existing relationships
• Term and termination: Initial term, termination-for-convenience mechanics, notice period, and post-termination obligations
• Governing law and dispute resolution: Jurisdiction, venue, and whether disputes go to arbitration or litigation [VERIFY: governing law selection per parties' preference]

Workflow

1. Classify the mandate — Determine transaction type (sell-side, buy-side, fairness, capital markets, restructuring) as this drives scope language, fee conventions, and regulatory considerations.
2. Define scope of services — Draft a precise services section that delineates what the advisor will and will not do. Avoid open-ended language ("and other services as requested") unless the client specifically requires flexibility; if included, add a mutual-consent qualifier.
3. Structure the fee provisions:
   • Retainer: Specify amount, start date, frequency, and whether retainer credits against the success fee.
   • Success/transaction fee: State the formula clearly (e.g., percentage of aggregate consideration, tiered brackets, minimum fee). Define "Transaction" and "Aggregate Consideration" to include cash, stock, assumed debt, earnouts, and other forms of value. [VERIFY: confirm whether earnout payments trigger additional fee obligations and at what point]
   • Fairness opinion fee: If applicable, state as a flat fee payable upon delivery, typically independent of outcome.
4. Draft the tail provision — Specify the tail period, the mechanism for identifying covered parties (e.g., contacted or identified buyer list delivered at termination), and any exceptions. Address what happens if a covered transaction closes during the tail with a different advisor.
5. Address indemnification and liability:
   • Grant broad indemnification to the advisor and its affiliates, directors, officers, employees, and agents.
   • Exclude coverage only for losses arising from gross negligence, willful misconduct, or bad faith as determined by final, non-appealable judicial decision.
   • Include contribution language for situations where indemnification is unavailable.
   • Specify survival post-termination (commonly indefinite or matching the statute of limitations).
6. Add standard protective provisions:
   • Confidentiality obligations (mutual or one-way, with carve-outs for required disclosures)
   • Limitation of liability (typically capped at fees received; no consequential damages)
   • No-fiduciary-duty disclaimer — the advisor is acting as an independent contractor, not as a fiduciary [VERIFY: regulatory requirements may impose fiduciary duties in certain contexts, e.g., municipal securities under MSRB rules]
   • Conflict-of-interest disclosure, including the advisor's right to represent other parties in unrelated transactions
7. Set term and termination — State the initial term, right of either party to terminate on written notice (typically 30 days), and obligations that survive termination (indemnification, confidentiality, tail, expense reimbursement).
8. Include execution mechanics — Signature blocks, counterpart execution, and any conditions precedent to effectiveness.

Output

The engagement letter should be formatted as a formal letter agreement addressed from the advisory firm to the client, including:

• Date and addressee block
• Recitals or introductory paragraph identifying the contemplated transaction
• Numbered or lettered sections covering scope, fees, expenses, indemnification, tail, confidentiality, term/termination, and miscellaneous provisions
• Signature block with acceptance and acknowledgment by the client
• Any schedules or exhibits (e.g., fee formula illustration, covered-party list template)

Quality Checks

• Fee clarity: Confirm every fee trigger event is defined — a reader should be able to calculate the exact fee owed from the letter alone without referencing external documents
• Tail coverage: Verify the tail provision specifies both the duration and the process for identifying covered parties at termination
• Indemnification completeness: Ensure the indemnity covers all advisor-related persons, includes contribution, and states the exclusion standard
• Scope boundaries: Confirm the letter distinguishes between included and excluded services; verify the advisor is not inadvertently assuming responsibilities outside the mandate
• Regulatory alignment: Flag any FINRA, SEC, or MSRB considerations that may apply based on the transaction type and parties involved [VERIFY: broker-dealer registration requirements and applicable FINRA rules for the specific advisory activity]
• Defined terms consistency: Check that "Transaction," "Aggregate Consideration," "Confidential Information," and other key terms are defined once and used consistently
• Termination symmetry: Confirm both parties have termination rights and that post-termination obligations (tail, indemnity, confidentiality) are clearly stated to survive