Corporate Finance Fees and Quality of Service | Round Table Discussion

Neil Ackroyd

Welcome 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 McNaughton

I 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 Ackroyd

Super. Chris what would you say?

Chris Williams

I 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 Ackroyd

And 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 Hale

Well 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 Ackroyd

Right, 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 Williams

I 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 Ackroyd

So 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.

Chris Williams

Absolutely

Neil Ackroyd

Both 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 McNaughton

Well 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 Hale

What 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 Ackroyd

So 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 Hale

Bob and Chris are probably better placed to comment on that particularly Bob from within. But from without yes definitely.

Neil Ackroyd

And Bob?

Bob McNaughton

Well 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 Ackroyd

I 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 Williams

No 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 McNaughton

I 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 Ackroyd

I 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 McNaughton

Well, 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 Ackroyd

Right. 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 Hale

Well 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 Ackroyd

So Chris – what would you say to that?

Chris Williams

I 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 Hale

To an extent, you get what you pay for, to an extent but there is an element of truth in that.

Neil Ackroyd

Yes. 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 McNaughton

I 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 Ackroyd

So 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 Williams

I 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 Ackroyd

So 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?

Bob McNaughton

Well I think that there are a lot of similarities, when it comes down to experience and capability rather than qualifications. I think that it is about a personal relationship, I have worked with Chris over many years because it has always been a successful relationship and why did I choose him in the first place, because he was able to demonstrate that he had experience in the areas that I was interested in, he demonstrated that and it became a successful long term relationship.

Neil Ackroyd

Right. And Chris?

Chris Hale

I think that that personal relationship is even more important or the closeness of the relationship with your lawyer is even more important that that with a lead advisor. Sometimes with a lead advisor I might appoint because they have sector knowledge or they know the potential buy universe. With lawyers, and I have also worked with Chris over the last 20yrs, I want somebody who understands me, who understands what is important to me and can help us deliver that efficiently and effectively. Again, I think the lawyers are the cutting edge of the transaction in terms of the depth of the transaction when you are staying up all night in the middle of tough negotiations when you are staying up all night in the middle of tough negotiations being able to help you judge what is really important and what isn’t so important to you and really helping you through that process. I always turn to my lawyer.

Neil Ackroyd

I guess in my experience as well, the lawyers do get into a much much greater level of detail on the SPA negotiations for example than the corporate finance advisor just by necessity , they are lawyers, they are drafting that documents and they are negotiating every bit of it.

Chris Hale

I think as a deal progresses the lawyers role becomes more and more important as you get to the execution phase, as the early stages the lead corporate finance advisor is the most important of the advisors choosing the tactics for selling the business, the community of potential purchasers that you are going to go out to, selling the business to them once you have got to that phase but once you have got 2 or 3 purchasers on the hook and particularly once you have got one of the hook, you are then into the documentary phase of it in an intense way and the importance of a lawyer will becomes paramount. That is when Corporate Finance advisor can get in the way.

Neil Ackroyd

Not good corporate finance advisors!!

Chris Hale

Not good ones – absolutely!!

Bob McNaughton

That documentary phase, the performance of your lawyers during that period is very revealing! There you are thinking you are working very hard, working 16-18hr days and you are finishing at midnight. A whole bunch of negotiations, various things have got to be reflected in an SPA, you have got to be back to work at 7am the next morning and there is a whole draft of documents that have reflected all of that and it amazes me that they always have to do this work overnight and in this intensive period and that’s when the strength of relationship is established that you know that you have got someone that you can depend on and rely on and will do a good job and at the same time they are there and very much involved in the commercial negotiations of a transaction.

Chris Hale

One important ingredient when you are appointing lawyers for the first time is to ensure that those that you are seeing are the ones that are actually going to do the deal. You are not dealing with the marketing team and somebody you haven’t seen is actually going to do the work once they are appointed. It is very important, at least I think, the lead lawyer, the lead partner to be intensively involved at the most difficult points of the deal. Another feature of some firms and some advisors is that they’re there at the beginning and the end and you are dealing with somebody else in the middle – that’s the vital bit!

Neil Ackroyd

I think that is interesting. We have got 5 Top Tips to Appoint a Corporate Lawyer on the website and you have hit on two of them right there and the first one is, is your lawyer a corporate lawyer and the other one is have you met all the team and make sure that upfront you have met them all. You are right, the lead partner should be involved in all the negotiations and the relationships and all that stuff but it is unrealistic to think that the likes of someone with Chris’s calibre will be drafting the disclosure documents. So you need to make sure that you have met all of that team and I guess the point that we haven’t really discussed that much is certainly on the smaller transactions, Chris you mentioned it earlier, and certainly just making sure that it is not your old family lawyer that is on the transaction. Even the best and highest quality Corporate lawyers have to spend 36hrs straight drafting a document because there is that much to get through and that’s with them having experience. If you throw that into a qualified lawyer, albeit someone who does other areas maybe pensions or whatever then it just does become a complete nightmare. Would you agree?

Chris Hale

Yes. What you need is a lead lawyer who knows what they are doing and who is experienced and has been round the block a few times. A lead lawyer with a good team around them and Bob touched on this, he won’t be doing the whole thing on his own. You have big teams on a lot of these deals and you need to ensure that the firm has the resource and has the resource at the moment that you need it to your deal.

Bob McNaughton

If you need an employment lawyer at 2am in the morning, it has been known!!

Neil Ackroyd

OK, so moving onto the sticky subject that I am sure a lot of people are tuning in to hear about, what should we be paying these guys for the privilege of being appointed?

Bob McNaughton

From my experience in dealing with the lawyers, you are really paying for the amount of work that is being put in. There is a degree of contingency involved but usually that revolves around whether the transaction happens or not. There isn’t really a success fee – either the transaction happens and there is a level fee estimated on the amount of hours that they have put into it rather than a percentage of the transaction.

Neil Ackroyd

Yes, Chris another point that comes out of what we are saying is that whilst you might pay a commitment fee for a corporate finance advisor and then the bulk of their fee on the successful legal completion of the deal, it is appropriate to incentivise a corporate finance advisor to try and get a deal done because that is why you are going to them. Whereas with a lawyer, if you make it too contingent ie you make too much of it reliant on the success of the deal then you are taking away some of the incentive to actually give you the advice not to do the deal and you want somebody like a lawyer to feel comfortable to advise you not to do a deal.

Chris Hale

Sometime the best advice is don’t do the deal and you are absolutely right and occasionally I deliver that message.

Chris Williams

When I have been working with lawyers, I think the key thing rather than thinking of it as a percentage or as a success fee as you do with a lead corporate finance advisor, is look at the complexity of the transaction to talk through with the lawyer you have chosen, get the very best estimate you can and then work with your lawyer to stick to that and it is a two way thing. If you make the transaction longer or more complicated, more difficult then it is going to cost more but if you choose the right lawyer, sit down and really talk about it upfront, understand what’s in it and then work together to try and stick to that – that is the only advice that I can give.

Neil Ackroyd

If you are coming into this transaction not having a raft of lawyers who you know who to go to, would you say that it would be fair to work with your lead advisor to help to appoint your lawyers?

Chris Williams

You should certainly take references and if at all possible, I would meet a couple of lead advisors and perhaps a couple of lawyers and you also want then to take references so talk to your lead advisor about your lawyer and talk to your lawyer about your lead advisor and if at all possible try and find two people who have worked together as well because that will help in terms of making things as smooth and easy as possible.

Neil Ackroyd

Thank you very much for your time today and joining us on Corporate Finance TV and I think that we have shared quite a lot of knowledge with our users and it should help them choose the right team. Thank you very much.