Selling a Business | Fees and Quality of Service | Round Table Discussion
Selling a business. Neil Ackroyd, hosts a round table discussion with Chris Hale (Traver Smith), Chris Williams (Private Equity Specialist) and Bob McNaughton (Non-Exec Advisor) about the fees and quality of service you should expect from your corporate finance advisor and corporate lawyer during the deal process.
Selling a Business | Fees and Quality of Service | Round Table Discussion
Neil Ackroyd is the Founder and principle interviewer at Corporate Finance TV.
Chris joined Travers Smith in 1983 and became a partner in 1987.
Neil AckroydWelcome to Corporate Finance Television. I am Neil Ackroyd, the founder of Corporate Finance Television and also managing director of Precision Corporate Finance. Today, we will be helping you with the knowledge to choose by hosting a round table discussion on fees and quality of service in Corporate Finance and Corporate Law.
With me today is Chris Hale, Head of Corporate, Travis Smith. A full service law firm best known for M&A work, private equity and public companies. Travis Smith are one of the leading firms in Corporate Finance in the UK and Europe and have been voted Lawyers of the Year numerous times.
Also with me is Chris Williams, a Private Equity specialist who spent 16 years with industry leader 3I, leaving as a Partner. Chris has invested in deals over the years from single figure millions to several hundred millions in equity value.
Lastly we are joined by Bob McNaughton who led 2 management buy outs of NCP Car Parks, first backed by SinVen and then by 3I. Now having successfully having exited NCP, he holds a number of non-executive positions helping Boards of Directors benefit from his wealth of experience.
Bob, if I could turn to you first. The first question that we wish to discuss is what should you expect from your Corporate Finance lead advisor and in terms of skills, qualifications and also the role they perform on the transaction?
Bob McNaughtonI think that the most important thing for me is that they have experience, they know what they are doing. One expects that you are going to have a qualified advisor, I don’t think that you are going to look directly at qualifications, you look at their knowledge, their experience, their capacity to do the job. And from my experience their ability to deal to work in a very pressurised and the intense environment of selling a business.
Neil AckroydSuper. Chris what would you say?
Chris WilliamsI would certainly echo that. I think that I would make sure that they have relevant experience for the size of transaction, the nature of transaction that you are envisaging. So if it is relatively small, make sure that they have had that experience. If its large, if it has a very specialised sector or if there is some other nuance to what you are planning that you get somebody who has done that before and then you have got to find somebody that you can work with. Taking Bob’s point, you will be working with for probably 3, 6, 9mths perhaps, you really need to get on with them and understand them. So spend time with them and make sure that this is somebody that you can work with closely.
Neil AckroydAnd Chris, I guess that you work with corporate finance lead advisors every day of your career – what is your view on what should be looked for?
Chris HaleWell I agree with both what Bob and Chris have said. The other thing that I look for as a lawyer interacting with them is project management skills because they’ll be pulling the deal together and what I want know is that they have got somebody experienced who knows what they are doing and who is going to facilitate the process rather than interfere with it. The danger is if they have somebody too junior doing that role we can find ourselves in the latter position rather than the former.
Neil AckroydRight, so a few grey hairs in terms of having been round the block a few times. And what sort of roles and task should a load of managers watching this discussion, what should they be looking for for their corporate finance advisor to take off them if you like in terms of responsibility with the corporate finance process – Chris?
Chris WilliamsI think first of all they need to know that they understand your business and they can therefore present it in writing and verbally and help you with presentations because it is not easy to understand how somebody views your business until you are standing on the other side of a camera or sitting in front of them. So they need to help you in terms of presentation. They need to make sure that the process is run efficiently because it will be a demanding process and they need to persuade the other parties involved from potential purchasers to the other advisors that they do their roles properly so they have got to be quite firm and clear about what has got to be achieved and make sure that it is achieved.
Neil AckroydSo they need to be taking a lead on the process as lead advisors kind of suggests but they need to be that kind of firm and in control individual that can marshal the troops accordingly when selling a business.
Neil AckroydBoth Chris’s – when you have been doing deals throughout your careers then those deals have been your day job but certainly Bob when you have deals to work on you actually have a day job so how important have your lead advisors been over the years in terms of enabling you to make sure that the deals goes through but also get that day job down very successfully?
Bob McNaughtonWell I think that the success of a transaction will be very firmly unpinned by the on-going success of a business and the best advisors are always very conscious of that. There are often critical activities going on through a process and the best advisors were because they took an interest and had a knowledge in the business and they would be aware of those things, so they would be pushing you to make sure that you didn’t neglect that parts of things and that you were focussed on the business. There is no doubt that as an owner of a business or a proprietor of a business involved in a transaction that it is a very very intensive and unsustainable process. It is not something that you can do for a long long time.
Chris HaleWhat I have seen on a number of transactions is that timetables have sometimes been too protracted and however skilful the advisors are there is inevitable a lot of time input required from the senior management team particularly the CFO/the FD and if the timetable is protracted the team can take its eye of the ball of running the business and on occasions I have seen businesses perform poorly as a result of that as the months go by. That then destabilises the whole process because the buyer sees the business deteriorating and they think well what’s going wrong and the deal can then fall apart. So there is an element of skill on the Corporate Finance advisors part in understanding that that might happen and managing it and managing expectations and managing the timetable.
Neil AckroydSo would you say in that case that there is also a benefit? We have a bit of a tendency in the UK to have lead advisors who are also chartered accountants, I don’t admit to it at parties but I am one of those, would you say that that is a benefit then in terms of the CFO/the Finance Director has a huge draw on them if the lead advisory firm can take pressure off some of those numbers and some of the transmission of those numbers and some of the understanding and analysis of those numbers. Would you say that that is a big benefit?
Chris HaleBob and Chris are probably better placed to comment on that particularly Bob from within. But from without yes definitely.
Neil AckroydAnd Bob?
Bob McNaughtonWell I would take the view that as a senior executive in any organisation should be very numerate and have a very strong grip of the numbers so I actually found a collateral benefit of being involved in a process. It actually made you look at your numbers again and again and again. And there were actually some collateral benefits in doing that. I would never see the situation that you are outsourcing the numbers to the advisors because you then can’t own them and the process is becoming something which is manufactured and artificial and I think that does happen, I have seen it. I think that it is absolutely essential that the management team, not just the CFO, but the whole management team own those numbers and are able to articulate them very well when they are dealing with a potential acquirer for the business.
Neil AckroydI think that that is a very interesting point. Certainly in my experience, there is a trade-off. You want your advisor to understand in some depth what is going on in a business and be able to transmit that to people. What you don’t want, I am sure Chris will echo this as a private equity specialist, the private equity specialist doesn’t want to feel that the advisor is driving the numbers and that they are not owned by the management team.
Chris WilliamsNo absolutely, they do have to be owned by the management team and to an extent the private equity house but the advisor needs to understand those and needs to understand how they should be presented to the best effect to the potential purchasers and that involves the advisor really getting underneath the skin of the management team and those numbers and if they don’t do that they will not be able to present it properly and won’t be able to help the management team to present it well.
Bob McNaughtonI think there is a good point that Chris makes about where the advisors, they don’t create the numbers but they are very good at how to present them best in the circumstances of the process that you are going through and that is where their input is invaluable. Numbers are not always presented in a single way. There are different solutions as how to present different parts of a business for example or how you structure them but underline the numbers absolutely has to be the management teams.
Neil AckroydI agree with that. I always say that the corporate finance transaction is more of an organic beast – it has a life of its own and a big part of a corporate financier’s job is to manage that beast and keep it alive and healthy and it grows and changes as it goes along. I agree that a big part of that is how and when to put information forward.
So we are getting a bit of a theme here from everybody that it is clearly very important that the lead advisor is involved in all the detail of the process and therefore I guess, has to be suitably intelligent and suitably qualified to be able to demonstrate that they have an in-depth grasp of businesses and can move from one business in one sector to another business in another sector. Would you agree with that Bob?
Bob McNaughtonWell, I think there are a broad set of skills which are transferable. I think that top of those skills is how you deal with people so those inter-personal skills in a pressured environment are absolutely critical but still sector experience and sector knowledge is still very valuable because there are relationships and knowledge which will inevitably come out through a process.
Neil AckroydRight. OK and moving on to our second question having discussed what makes a good corporate finance advisor, I think a lot of people are watching this are wanting to know how much a corporate finance advisor should be paid and what a reasonable market fee is because none of the people, in my professional opinion, are willing to say that on their website so why do we not try and answer that for them. Obviously that varies on size of transaction and whether it is a buy side or a sell side of the transaction. But why don’t I throw that open to you Chris first.
Chris HaleWell it depends on what sort of size of deal you are talking about. If you are looking at deal with an enterprise value of more than £100m, you would expect the Corporate Finance advisor to be charging a 1% fee if they are on the sales side and perhaps racketing up to encourage a higher price to a number larger than that above say £120m if the target was say £110m they might be getting another 0.5% and then ratchet up even higher than that once you get into the really deal glory territory.
Once you are below £100m the percentages become much more variable. The smaller the deal the less relevant the percentage is. It’s the absolute number that you need to be looking at. So if you are dealing with a deal below £10m the percentage fee might be 5% but what you actually want to look at is the £ number and whether that’s what you think is good value for what you are buying from the advisory firm that you are appointing.
Neil AckroydSo Chris – what would you say to that?
Chris WilliamsI would agree with Chris’s assessment of the market rates. I would certainly encourage everyone to hire the best you can. You are trying to maximise price, reduce the overall cost and trauma of the transaction and most transactions do involve a great deal of stress and heartache. Hire the best you can and hire the person who is right for the transaction, the one with the most experience, the one that you are closest to, the one who understands the most and who understands you and if the difference is a small percentage or a small number then think of that not as a cost but think of the benefit that comes from having the right advisor on board.
Chris HaleTo an extent, you get what you pay for, to an extent but there is an element of truth in that.
Neil AckroydYes. It is not just the benefit of getting the right advisor but it is also the determent of getting the wrong advisor. Bob what is your view on those numbers?
Bob McNaughtonI don’t think that I have ever chosen an advisor for their fees. I have chosen them for their capability to do the job. What I would add on fees is I definitely agree they should be incentivised to maximise performance. Getting the point of ratchet right is probably the critical thing so that you know that your advisor is going to be working hard to get over a certain point and not benefiting from a ratchet when they don’t necessarily have to work hard to achieve to that.
Neil AckroydSo we are getting quite a strong message, don’t effectively use fees as your criteria for selecting a corporate finance advisor from some fairly experienced guys. There are a couple of points of interest. Clearly Chris you are a very experience Private Equity specialist but what is your view as a specialist on appointing advisors?
Chris WilliamsI think most private equity houses do appoint advisors for both buy side and sell side but not all. I would recommend that all private vendors should appoint advisors. Almost my worst nightmare was being introduced to an interesting business, an interesting opportunity where I heard that the vendor was appointing his long-term accountant and his lawyer who was a friend from school. There you saw somebody where you just knew that the process was going to be awful and not good for anybody involved. So yes, Private Equity does use advisors and I do use advisors, I have a lot of private equity and transaction experience but still having somebody to sit between me and process, if that makes sense, as an intermediary, because if you are looking at selling to your management team or if you are looking at selling to a competitor having some space between you and that discussion with those people can often be very valuable to the negotiations especially in the last period of time when you are getting towards the end of the sales process.
Neil AckroydSo even people who are vastly experience on transactions still see the benefits of lead advisory.
So we are going to move onto our second question which is a very similar question but really with corporate lawyers what should be expect in terms of service and role from Corporate Lawyers?