9 ways to minimise fees on a corporate deal
Corporate transactions are notoriously expensive, but with the right approach professional fees can be kept to a minimum…
Buying and selling companies is never a straightforward process, even for the most experienced entrepreneurs and investors. For those embarking on their first corporate deal, perhaps after a lifetime's work growing a successful business, the experience can be very daunting indeed.
Indeed, the scale, duration, intensity and cost of a corporate transaction tend to be far greater than that typically experienced during the normal day-to-day operations of a business.
Whilst every transaction is different, professional advice on corporate deals is not cheap, primarily due to the breadth of expertise required. As a general rule, more complex transactions tend to require more specialist input and more extensive documentation, resulting in higher deal fees.
Whilst some of these factors will be outside the control of the parties, the good news is that there are many variables that can be controlled. Whilst you need to consider the overall objectives of the parties (and their relative bargaining power) there are various ways to keep deal fees to a minimum and reduce the risk of nasty surprises further down the line.
9 Factors Affecting Professional Fees on a Corporate Deal
- The structure of the deal
As a general rule, complex deal structures cost more to implement – largely because they tend to take longer to agree and are more difficult to document.
There is often much to be gained from identifying the simplest approach whilst heads of terms are being negotiated (and involving lawyers as early as possible to help with this). Where a target company has the luxury of deciding between multiple buyers or investors the complexities associated with each potential party's proposals should also be considered.
- Timing issues
Most professional fees are broadly calculated by reference to how much time needs to be spent on the transaction (even where a fixed fee or commission structure is agreed). In general, the longer a deal takes to complete, the more likely it is that professional fees will be higher. Corporate transactions often take longer to complete than the parties initially expect, so it's important to consider the cost implications of an overrun and set realistic timelines.
Another possibility is that the parties want to get a deal done within a very short timeframe, perhaps before a financial year-end or expiry of an exclusivity period – or indeed before Christmas! Where advisers are expected to work very urgently and prioritise one transaction over other clients' work this is likely to incur a cost premium.
You should also consider any third-party approvals that need to be obtained before a deal can be completed. If consent is needed from lenders, landlords or regulators, or clearance is required from HMRC, this should be obtained in good time to avoid unnecessary delays once the transaction is up and running.
- Price and payment
Whilst the simplest pricing option is always cash payable in full on completion, more complex arrangements are typically agreed, even on very small deals.
Purchasers will often insist upon the price being paid in various ways, which may include a combination of:
- Cash on completion
- Deferred consideration
- Earn-outs, where one or more of the sellers continues working for the company after completion
- Consideration shares or loan notes issued by the buyer
Whilst price and payment terms will be keenly negotiated, the complexity of the arrangements will inevitably affect the cost of the deal. For example, where the seller is receiving shares in the buyer this will need to be carefully documented to ensure that the seller's interest is adequately protected. Similarly, an earn-out or deferred consideration may require protection for the seller, and will mean that further advice is required at a future date to establish how much should be paid to the seller.
Another important factor is whether the price is fixed or subject to adjustment depending on trading and asset values. If so, the price is calculated after completion of the deal with reference to accounts which are prepared as at the date of completion. There will be cost implications for agreeing the completion account mechanism and having the completion accounts drawn-up.
- How is the deal being funded?
On the face of it this is only an issue for the buyer or investor, but in reality the choice of finance arrangements will often have indirect cost implications for the seller too.
For example, lenders will often require a high standard of due diligence, which may place a greater burden on the sellers and their advisers to respond to the lender's enquiries. Lenders will require various security arrangements, which will take time to prepare and implement, particularly if any security is going to be granted to the sellers.
This is another important consideration for a seller who has multiple potential buyers or investors to choose between.
- The number of parties involved
It is not uncommon for each party to instruct its own agents, lawyers, accountants and corporate finance advisers. Where there are multiple sellers/buyers/investors/lenders, this can make effective communication very difficult indeed.
It is sensible for each party to establish clear boundaries and carefully define who is responsible for each task or process. For example, who will be heading up negotiations? Who is responsible for overall project management of the deal? Who is giving tax advice?
Clarifying roles at the outset will help to minimise confusion and avoid duplication.
- The health of the target company
One of the biggest factors affecting the cost of a corporate deal is the level of due diligence that is undertaken by the buyer/investor. This can be a frustrating process for all parties, with sellers becoming irritated by the volume of enquiries received, and buyers or investors feeling as though the seller is withholding vital information.
Companies with a clean bill of health tend to require much lighter due diligence than those which have been poorly run or have numerous unresolved issues. Where a buyer or investor has serious concerns, they are likely to insist either that certain issues are resolved before completion, or that more detailed warranties and disclosure be given by the sellers – both of which are likely to ramp up the cost of the deal.
The most successful exits are planned well in advance, giving management a clear window of 12-18 months to ensure that known issues are resolved before the transaction begins. Where the seller knows of potential issues, it is often sensible to disclose these early on in the transaction, before significant costs have been incurred, so that the parties can agree the best way forward.
- What will happen to the staff?
Employment arrangements are another key factor affecting the overall cost of a deal. Where a company has many employees, and wholesale changes are envisaged, this will require more specialist input and negotiation from employment and tax lawyers.
Individual employees may also require independent legal advice in relation to proposed changes.
Some issues to consider include:
- Will any employees be receiving shares or payment under an employee share scheme?
- Are any directors/employees resigning and if so on what terms?
- Does the buyer/investor want to introduce new employment contracts?
- Will any key employees receive shares or share options to incentivise their future performance?
- The attitudes of the buyer and seller
Crucially, the parties themselves have huge influence over how smoothly a deal runs and the professional fees they will ultimately pay.
For example, have all parties agreed to progress the deal at the same speed? Is there a consensus that the parties will negotiate in good faith and avoid aggressive negotiations each time an issue arises? Do the parties have shared commercial objectives and want to conduct the transaction in a similar way?
There is also something of an art to engaging with professional advisers generally – particularly striking a balance between being available, quick to respond and thorough, but also trusting your advisers' judgment and resisting the temptation to try and micro-manage every facet of the deal.
Another important factor is how the parties plan to resource the deal. Corporate deals are very demanding on sellers/management, particularly where they are also involved in the day-to-day running of business. Failure to set aside enough time to work on the deal can lead to professional advisers plugging the gap, which can increase costs.
- The quality and approach of the professional advisers
Assembling the right team is crucial to the success of a deal. There are two common pitfalls that should be avoided by parties who want to keep deal fees to a minimum.
You need advisers who are sufficiently experienced and technically proficient to run the deal competently and efficiently. For example, where advisers are out of their depth or working outside their area of expertise there is a risk that documents will need to be heavily redrafted.
Advisers should also be prepared to take a pragmatic, commercial and sensible approach. This will help to avoid seemingly endless rounds of negotiation and redrafting of documents.
Whenever possible, you should agree with your advisers the approach that you want them to take during the deal. It's also worth speaking to your advisers' other clients to hear about their experiences and find out what they recommend.
For more information on this topic, please contact Dan Partridge.
This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.