The 6 Questions to Ask Before Signing the Engagement Letter

Most engagement letters are 8 to 15 pages of dense, repetitive legal prose. Most founders sign them on the strength of a 90-minute pitch, a couple of reference calls, and a feeling. The legal review, if it happens, is a quick pass by a corporate attorney who specializes in something other than sell-side M&A engagement letters.

If you only have time for six focused questions before you sign, ask these. They cover the entire surface area of where these documents fail founders.

1. What is the exclusivity scope?

An engagement letter typically grants the banker exclusive sell-side representation for the duration of the term. The question is how that exclusivity is scoped. Three variables matter.

First: geographic scope. If you are open to international buyers, is the engagement worldwide, or limited to North America? Most lower middle market deals are domestic, but some are not. Make sure the scope matches your buyer universe.

Second: transaction type. Does the exclusive cover only a full sale, or also a recapitalization, a minority investment, or a strategic partnership? You want the engagement narrowly scoped to the deal type you actually intend to pursue. If you later decide a minority recap is the right path, you do not want a clause that says you owe the banker a fee anyway.

Third: subsidiaries and affiliates. The exclusive should cover the operating entity you are selling, not every business you happen to own. Founders with multiple businesses get caught here. If you have two unrelated companies and the engagement is broadly drafted, the banker can claim fees on the other one even if it was never in scope.

2. What does the retainer actually buy?

Bankers charge retainers because they do real upfront work: financial modeling, materials preparation, buyer list building, market check. The question is whether the retainer is creditable against the success fee at closing, and whether you get something tangible for it if the deal does not close.

Reasonable structure: 25K to 100K paid in monthly installments over the first three to four months of the engagement, fully creditable against the success fee at closing. If the deal does not close, the retainer is the banker's compensation for work done. If the deal does close, you get the retainer back in the form of a reduced success fee.

Unreasonable structure: a non-creditable retainer of 250K paid up front, with no deliverables tied to it. That is just a fee for showing up. Push back hard.

If a banker insists on a non-creditable retainer, ask what specific deliverable they will produce for it. "A confidential information memorandum, financial model, and management presentation" is a legitimate answer. "Strategic guidance" is not.

3. How is the success fee calculated on non-cash consideration?

Headline success fee percentages are easy to compare. The math on non-cash consideration is where the actual money is. Walk through every category with the banker before signing.

Stock: public stock at closing-date market value, private stock at the valuation used in the purchase agreement. Discount for restricted stock? Probably not, in 2026. Founders who push for a haircut on long-lockup public stock sometimes win.

Earnouts: pay on amounts as earned, not on potential. This is the single most important non-cash provision. Bankers will push for present value of the maximum at closing. You should push for cash on cash. Land somewhere in the middle, with most weight on actual earnings, not expected earnings.

Rollover equity: typically counted at face value into the transaction value, with the fee paid in cash. Painful but standard. If rollover is likely to be large, negotiate a partial deferral so you are not writing a check on equity you have not monetized.

Assumed debt: counted into the transaction value. Always. There is no fair argument against this.

Escrow holdbacks: paid as released, not at closing. Some bankers will agree to this, some will not. Push for it; the holdback is uncertain consideration.

4. What expenses are passed through, and what is the cap?

Bankers pass through out-of-pocket expenses at cost. The question is: which expenses, and what is the cap?

Reasonable pass-through: travel, third-party fees (data room, virtual data room subscription, marketing materials production, printing if any). Total cap for a typical 9-month process: 50K to 75K.

Unreasonable pass-through: in-house services like graphic design, model building, sector research, junior banker time. None of those should be billed separately. They are part of the success fee.

Always require expense reports monthly and a cap that requires your written consent to exceed. Open-ended expense provisions are how 30K expense buckets become 150K expense buckets.

5. What is the engagement term, and how can it be terminated?

Standard term is 9 to 12 months. Anything longer is suspicious. Bankers who want 18 to 24 months are either signaling they expect the process to take that long (which means they are not confident in the outcome) or trying to extend their tail period coverage (which is the real motive).

Termination rights matter even more than the term. The ideal engagement letter has mutual termination rights after a stated period (say, 6 months) with reasonable notice (30 days). Bankers will resist, arguing they need certainty to invest in the process. The compromise is usually: bilateral termination after 6 months on 30 days notice, with the tail clause applying as written.

Worst case scenario you want to avoid: a unilateral termination right for the banker (they can walk away with no penalty), no termination right for you, and a 12-month term. This is a slave contract dressed up as an engagement letter. It exists. Read carefully.

If the engagement is going badly, our guide to firing a banker walks through how to exit cleanly.

6. What does the tail clause say, in exact words?

We have a whole guide on this. The summary version: tail duration should be 12 months, scope should be limited to parties on a pre-agreed list or parties who received the management book under NDA, and there should be a successor-advisor haircut provision (50 percent reduction if a new advisor closes the deal).

Read the actual words of the tail clause. Out loud, if necessary. The single sentence that defines "covered parties" is the most important sentence in the entire document, and it is usually the one founders skim over because it sits between two boilerplate paragraphs.

If you can only push back on one provision in the entire engagement letter, push back on this one.

Bonus question: what conflicts does the banker have?

A seventh question, free of charge. Ask the banker which buyers in your likely universe they have represented in the last 24 months, or are currently representing. Some boutiques have meaningful buy-side practices alongside their sell-side work. That is not inherently a problem, but you want to know.

A banker who has just sold a similar company to one of your top three strategic buyers may be a great banker for you (they have the relationship) or a problematic one (they cannot afford to push hard against a client who is a future fee). Make them disclose. Make sure the engagement letter has appropriate conflict-of-interest representations.

Then read founder-verified reviews of the firm before you sign. The bankers in our directory who consistently get strong marks on responsiveness and delivery are the ones most worth your time. And when your own engagement is done, however it goes, add your own review so the next founder gets the signal you wish you had.