There are lots of factors which will help you to pull off a good deal on your transaction. In this insight we look at the terms proposed by your corporate finance adviser. The problem for you is probably this is the first time you have had to consider corporate finance fees. Being honest, you have no idea what is a good deal. You may feel ill equipped to negotiate but that can change with the strength of our experienced hand.
Transactions are at a low at the moment in the current economic climate – so if you have a transaction now is a good time to negotiate.
We look at:
- What are you getting for your money?
- Courts unsympathetic if you agree a bad deal
- Getting the best from your corporate finance adviser
What are you getting for your money?
The biggest area of concern for any seller with regards to its corporate finance adviser is the fee it will charge for the service it provides. But picking the right corporate finance adviser is about so much more than fees. You should think about whether your corporate finance adviser:
- undertakes research and due diligence to ascertain the most suitable buyer (and is one that you can be comfortable in thinking will actually buy your business rather than waste your time). Think strategically from the start – why is a buyer being put forward likely to be suitable;
- knows your industry and is able to invite and negotiate offers for the business;
- will liaise with professional advisers such as accountants and lawyers to move the transaction along; and
- coordinates and manages the process throughout the period of engagement to keep a lid on costs.
Basis of charge for corporate finance advisers
There are various fee structures a corporate finance adviser may want to adopt. The typical fee structures you should be aware of are considered below.
The fee structure agreed between you and a corporate finance adviser is likely to vary depending on the nature of the engagement. For example, a complex share purchase with elements of consideration which are not fixed if they depend upon future performance is likely to be priced differently to a straightforward one. Deferred consideration may include a mechanism for a lump sum to be paid on, say, the first anniversary of completion of a transaction to a complex earn-out provision where all or part of the purchase price is calculated by reference to the future financial performance of your company. The structure and quantum of a corporate finance adviser’s remuneration will therefore be a matter of negotiation between the parties.
The typical remuneration provisions are as follows:
This is a fixed sum (sometimes called a “transaction fee”). It is generally a fixed amount for advising on the transaction regardless of whether or not it completes. We recommend a discount is negotiated if the transaction fails to complete.
Success fee or commission
A success fee may be structured as either a fixed amount or as a percentage of a specified value. You may be interested in this as it ties a corporate finance adviser’s remuneration to the successful completion of the matter and is often popular with sellers in periods of economic uncertainty or if the seller will not have the funds to pay the remuneration of the corporate finance adviser unless the transaction completes. Any seller must consider that any remuneration value may well have been increased by the negotiation skills of the corporate finance adviser as it balances the risk against not receiving some or all of the proposed transaction payment.
This is a fee (if any) that a corporate finance adviser will be paid if the transaction fails to complete. This should be resisted by a seller. It is likely (and not unreasonable) that a corporate finance adviser will also seek to recover its reasonably incurred expenses. How disbursements are incurred and any conditions or company sign-off for incurring expenses above a certain threshold should be included within any engagement letter.
The fee provisions should be reviewed in light of the termination rights in the engagement letter and provide for what is to happen if either party terminates the engagement for fault or if the transaction fails to complete for force majeure reasons or in another scenario where neither party is at fault.
If certain milestones are reached, a seller may be liable to pay staged fees to a corporate finance adviser. For example, a corporate finance adviser may require a percentage of its fees to be paid on the signing of heads of terms and the remainder to be paid on completion of the transaction.
Fee tail or tail gunner
Historically, a corporate finance adviser’s engagement was terminable and often at short notice. This leaves the corporate finance adviser at risk of the seller terminating the engagement before completion of the transaction having occurred in order to avoid having to pay a success fee. The fee tail or tail gunner clause has been developed to deal with this eventuality. The structure of this fee arrangement provides that, if the transaction completes within a given time after termination of the corporate finance adviser’s engagement, the success fee is payable to the corporate finance adviser exactly as if termination had not occurred.
Courts unsympathetic if you agree a bad deal
Whilst it may seem unfair, in Seymour Pierce Limited v Grandtop International Holdings Limited  EWHC 676 (QB) (Grandtop), a corporate finance adviser’s former client tried to resist having to pay such a fee. It was argued that, amongst other things, there was no merit in the corporate finance adviser’s claim for a success fee where it had not brought about completion of the transaction. The High Court ruled that this was irrelevant and it all came down to a question of interpreting the engagement letter.
Two sets of fees were payable
The ruling in Grandtop meant that two corporate finance adviser fees were required to be paid by the sellers. Most clients are uneasy about paying one corporate finance adviser, let alone two. Given the ruling in Grandtop and there being no material change in stance of the courts in connection with these types of fees, contracting parties should not presume that the courts will come to their assistance just because the terms seem uneconomical or unreasonable. Everything turns on the drafting of the clauses which is why seeking advice is key to reducing the risk of paying corporate finance adviser’s fees that you do not think should be payable.
Work around solutions in practice
Whilst the inclusion of a fee tail or tail gunner clause is often described as “non-negotiable” sellers should seek to challenge. If it cannot be resisted in full, consider:
• shortening the clause’s duration from, say, 12 months to 6 months or providing that the fee is reduced according to how long after termination of the corporate finance adviser’s engagement completion of the transaction occurs; and/or
• providing that the clause should only operate if the seller has terminated the engagement otherwise than as a result of the corporate finance adviser’s default. If the clause is also intended to apply after termination by the corporate finance adviser, the seller should insist that this should only apply if it has breached the agreement.
Getting the best from your corporate finance adviser
We work alongside corporate finance advisers and can:
- comment on whether the charges and services offered are the best around;
- push a transaction along towards completion as quickly and as efficiently as possible;
- guide on the legal due diligence process undertaken between a buyer and a seller; and
- be on hand to respond to production of the legal documentation such as share purchase agreements and corporate authorisations.
Retaining a lawyer from the outset can put you in a better place and does not always cost a fortune.