Lesson #8: What will it cost me to sell my business? Who do I really need to help me?
Selling your business is an important and significant life event. Few people get to build an enterprise that somebody else wishes to own and will pay a significant sum for. Often, it’s the most valuable material asset you own and is the result of a lifetime’s work. When it comes time to sell or merge, it makes sense to do it right.
What will it cost me to sell my business?
Assuming you are in the school that wishes to get professional help, some fees will be involved. The old saying, “You get what you pay for,” is relevant here. The cheapest option is not always the right choice. To quote Warren Buffet,
“The price is what you pay, value is what you get”.
Many people opt to handle things themselves, believing it is the cheapest and, therefore, the best way forward. This is often the strong tendency of an independent entrepreneur, sceptical of professionals (often justifiably), and a type “A” personality. This independent approach has often worked well throughout their careers, so why change now? When speaking to those minded to handle it themselves, we ask,
“When was the last time you did something for the first time?”
Mergers and Acquisitions is a specialist game, and to optimise your outcome you are going to need a team. Your acquirer will have their team, and they are unlikely to be doing this for the first, or even second, time – most acquirers are serial in nature, and they know the game well.
There are three broad areas that you are seeking to optimise when selling or merging:
- Finding the right buyer in the first place. The right buyer is active and can move immediately. They must also have well-articulated acquisition criteria, and in our view, for potential acquirers to be shortlisted, that criteria must genuinely match your business. This is beyond an initial “tea and cakes chat” where it’s just a high-level love-in. “Oh, we are buyers.” “Oh, what a coincidence, I’m a seller.” Maybe it’s a sign? Yes, it is a sign. It’s a sign that no proper qualification has taken place. For a buyer to be genuinely strategic and to give yourself a serious opportunity to secure a strategic premium, there must be a true synergistic match; your business must solve some kind of problem for the buyer. Outside that, it’s opportunistic at best and, if you’re not careful, an enormous waste of your time.
- Assuming you have the right sort of buyer (hopefully buyers, plural), then you are now after the right valuation. In our view, this definitely requires a team, and a certain detachment by the vendor from direct negotiations. Certainly, the vendor is involved and retains ultimate control, however, don’t get in the ring yourself. You are likely to take things personally. When emotions go up, intelligence typically goes down. (Read Lesson #1 here)
- The next key is the terms. (Yes, I know the price is part of the terms, but bear with me). Terms can be complex. Only half the deals we handle for clients are cash deals; the other half have some kind of deferment or earn-out. Even the cash deals have a retention of 10-15% to cover warranties, for example. These terms need to be negotiated as hard the as the headline number.
Professional assistance can be a great advantage at this point. As a knowledgeable, professional firm, we can benchmark from actual similar deals and use our experience to push back and get creative to balance out risk for you as the vendor.
What can I expect to pay?
Let’s get back to the team idea. As a vendor, we think there are three components you need to cover to optimise your outcome.
1. A competent and experienced corporate advisor who understands the key dynamics in your sector. They should have a good track record and be able to point to actual deals done that have relevance. The real value of advisors, provided they know what they are doing, is their system and strategy (which they should be able to explain) to secure the right buyers. Their system should be able to qualify out the tyre kickers and therefore only match you with the most synergistic buyers who have been independently qualified, in many cases without them even mentioning your business.
The fees for this work typically fall into two types.
a. A retainer or what we call an Investigation Fee. This fee will cover on-boarding costs, the costs of getting their team across the business, its key features, and financials. They should also be able to advise on how the business should be positioned to different types of buyers.
This fee will underwrite part of the costs of conducting a thorough and detailed contact campaign (our average transaction timeline, start to finish, is 13 months, although it blew out during Covid). The advisors will surface potential acquirers through research and then speak with the strategy setters to establish if they are active and what their criteria are.
Our investigation fees typically cover 50% of our actual costs for conducting a 12-month campaign. Deals are rarely done quickly or easily, and the first offer is not always the right offer.
So, why would we, or any corporate advisor, lose money in the investigation phase? I’m glad you asked.
b. The scale fee or success fee is the payment made to the advisor once a deal is complete and the vendor has been paid. This fee is typically a percentage of the transaction value. This normally compensates the advisors for having taken a financial bath during the campaign (which is fair enough, advisors should back themselves and share the risks with the vendor).
If the advisors are good, however, they will provide a significant return on their fees. Finding the right buyer rather than relying on an approach will have normally moved the price north intelligently and creatively, beyond what a vendor might achieve by himself (admittedly, there might be exceptions). We see significant improvement way beyond our total fees after the initial offer. And finally, and just as importantly, good advisors will improve the terms and seek reductions in risk for their vendor.
Who can I get to help me?
Why not resist paying any retainer or investigation fee, moving all the risk to the corporate advisor?
We think this is foolhardy. Whilst it seems wonderful and risk-free for the vendor, who can afford to work for 12+ months without any fees? The problem with this is that other paying clients will get the attention, and work done on behalf of the no-win no-fee client is, in our view, likely to be substandard – it lacks the focus, discipline and sheer effort required to get something good to happen. Some estimates suggest that there are up to 14 businesses in Australia currently chasing each buyer – so persistent focus and effort are key.
What about if somebody approaches me and wants to buy the business?
This is likely to happen to many potential vendors. Private equity, private capital buyers and trade players do this frequently. However, we don’t like the odds! Firms that approach others are often opportunistic, knocking on other doors simultaneously and creating a pipeline of options.
That said, deals are often done like this and may be worth considering. However, even in this situation, we still think the vendor is well served by having professional assistance. We have helped many vendors in this scenario, and if the transaction completes with the buyer who has already approached our client, our fees reflect the circumstances by being lowered significantly to reflect the saving of time and effort. Additionally, even in this scenario there are normally plenty of opportunities to get great value from the right advisor. It is also good to have your advisors work with you on a plan B whilst negotiations occur with the party that approached you.
Why not just use my lawyer?
An approach by a potential buyer still demands qualification; it still requires an engagement with a potential buyer in a manner that is professional, efficient and does not drag the process out.
Information requests will be made, sensitive information will be demanded. This needs vetting. Rarely in our experience can or will a lawyer want or know how to do this. You will be left managing a buyer who is often talking to other vendors, which will be a hugely distracting process, and, if not managed, will extend beyond what is fair and reasonable as the buyer seeks more and more information.
A good advisor will significantly shorten this period and promptly and efficiently secure an indicative offer in writing before wasting too much time and energy before releasing sensitive information.
What Other Fees Can I Expect?
2. Competent and professional tax advice is essential. This is preferably sought two years or more before an exit. This is because if there is a necessity to restructure to optimise the net of tax gains for the vendor, then it is ideal to do this well in advance of a transaction.
In any event, getting specialist tax advice regarding the optimisation of the proceeds is often worth its weight in gold. This kind of advice will cost, however (much like corporate advisory fees), will often not cost you anything once you factor in the improvements in the vendor’s net position and normally provide a significant return on the investment.
A word of warning, your local tax accountants may not be the people to do this. Depending on the complexity of the transaction, you may have to seek more specialised input. A good accountant will know his limitations and refer, but not always, so beware.
3. Legal advice from a lawyer who is familiar with M&A is critical. This does not have to cost the earth, although if not properly managed, it will! When procuring any professional services, we advise clients to seek three proposals, normally based on a detailed terms sheet, and then ensure that the quotes are fixed. Now they may have some carve-outs, but essentially this is the best way to keep everyone honest. Lawyers do not like to fix fees; they will resist, but the good ones, who know what they are doing, will give you a fixed estimate based on certain key assumptions.
Moving into the legal side of the deal with the clock running freely is NOT advised. Rarely do we see the need for lawyers to be engaged until the commercial due diligence is out of the way. Typically, we see due diligence lasting 12 weeks, with lawyers commencing activity in week seven.
This was a long blog; however, we see so much angst and confusion over fees and wanted to put context around the basis for them. Importantly, we wanted to set out the basis for having a team, including tax, legal, and commercial input. Good corporate advisors with a strong track record should add significant value, providing advice on important aspects of the commercial arrangements before it gets near the lawyers.
If you have any questions about fees and the role of the various advisors, call me or one of my partners anytime.