Fee arrangements when selling a business

The typical success rate of a success fee only broker is significantly less than half, whereas advisors complete approximately 80% of the deals they engage on. This is typically because they are paid to prepare the business properly and in doing so are much more capable at identifying why specific parts of the business will attract interest and therefore value.

Tax risks fall into two categories in an M&A transaction. Firstly, those that relate to the seller and secondly those that are shared between both the buyer and seller.

The first is straight forward – shareholders and option holders will want to understand their personal tax consequences and any long-term consequences to IHT. They may want to undertake some planning, setup a family investment vehicle for example. If there is deferred or earnout payment there are choices to make on tax and similarly, if consideration is paid in a mix of cash, shares and loans there are consequences. Sellers expect this from the outset and will normally always expect to engage an advisor for support.

Tax risks between both the buyer and seller are often forgotten – most businesses sell to larger entities that are likely to take a more detailed view on accounting, tax and financing than the current owners. The accounting standards they work to may be different, their auditors may be more diligent and most importantly their financiers who are funding the deal will want detailed reliance reports before signing off the deal and monthly thereafter.

A classic negotiating tactic which is both legitimate and yet irritating to sellers is when the buyer, or their due diligence provider, raises tax risks that the seller simply isn’t aware of. This is normally positioned in such a way that is beyond the day-to-day knowledge of the seller’s accountant’s and so the sellers must bring in more experienced advisors. Of course, the buyer may be right, but normally, rather than being black and white there is a grey area of debate.

Brokers are completely out of the picture during this – in this moment you need a proper firm of advisors.

Brokers lack the expertise to manage such issues. Buyers can exploit these gaps, leveraging contingent liabilities to negotiate better terms. Sellers working with brokers alone should expect to need to appoint appropriately.

Buyers lose negotiating power when they know that the sellers’ advisors are incentivised to tell their client to walk away from a deal. This is a basic tenant of negotiation. It isn’t enough for the seller alone to be ready to walk away unless the seller has a track record of selling previous companies that the buyer respects (i.e. their perception of your M&A experience as a seller is what matters).

Buyers respect credible advisors as the tool to reach reasonable, commercially appropriate and experience-based conclusions on bridging a variety of matters relating to deal terms. In order to avoid the sellers appearing inexperienced and petulant (and remember you and/or your team will often have to work with the buyer afterwards), it is critical that the build-up to the moment of ‘walking away’ is done via advisors as those build up steps a) carry far more weight as the buyer knows it isn’t about fees and b) this builds the professional perception of the seller rather than undermining it.

This reverts to the concept of good cop, bad cop. When a negotiation gets tough, the seller must remain the good cop, and the advisor is bad cop (just like the buyer should be good cop and their lawyers and due diligence providers are bad cop). This means that buyer and seller can always dismiss the advisors and reach sensible, mature and balanced conclusions – informed by the advisors – when the tricky moments arise. However, if those advisors on both sides were not present the ability to take a step back gets removed. This is because a) the technical information that forms the basis of the bad cop arguments is either missing or unbalanced (e.g. the buyer has better technical insight and the seller, in the absence of proper advisors, doesn’t have a technical response) and b) things get heated quickly and there is no one to deflect that heat toward which inevitably means that the buyer starts to view the seller as someone they may not want a long term relationship with (when we have to wade in and solve these problems mid-process buyers will often say they’re already nervous that the seller is “petulant” or  “inexperienced at this level” or “commercially unrealistic” and the broker or weak advisors are “not contributing when it matters most”).

In key moments of the negotiation, sellers can maximise their performance by making sure strong advisors are by their side. Acting as bad cop the advisors protect their client’s position, whilst the advisors engage with the buyers, their due diligence and legal teams. This is simply critical to successful negotiation outcomes.