Some of the most successful deals we work on in our M&A team at Mishcon de Reya involve early engagement by the company of an experienced and strategically focussed external corporate finance advisor. They can bring genuine value by developing a sound marketing narrative and - with the lawyers - ensuring the smooth running of the deal process.
Here are some of the things to consider when looking at engaging external corporate finance advisors:
What do they do?
While the term "corporate finance" can mean different things in different markets (for example, corporate finance in the USA usually includes anything related to a company’s finances and capital), in the UK we mean the business of making deals to acquire, sell or change ownership of a business happen.
Corporate finance professionals are brought in by operating companies to provide an external lead to the process. They can assist with expert input on valuation, marketing materials, accounting matters, strategic negotiation, deal structuring and project management of transactions.
Do we need them?
There are a variety of factors to consider:
The size of the deal.
It can be tough to get many corporate finance advisors interested in smaller deals - there's an inflection point for involvement. We have contacts with some advisors who are prepared to get involved with deals where the price is likely to be only a few £million. However, the more institutional outfits will not see small deals as economically viable for them.
Do you know who your buyer(s) would be?
Not uncommonly, a company will be aware of who their most likely acquirors would be and may have sought to consciously "tick their boxes" in the course of their growth journey. We therefore get asked whether it makes sense to engage a corporate finance advisor if the list of trade buyers is already short and well known. Quite often the answer is "yes", although this sort of scenario might mean that some negotiation can be done around the success fee element of the advisor engagement if the counterparty turns out to be someone that the target already had a relationship with.
The in-house expertise/experience held.
Sometimes, companies are confident that they can deliver their own deals most effectively in house. This may be because they have good experience in M&A within their own corporate development teams, or their officers have substantial deal experience and have a clear idea of what needs to be done. This can work well, but we would typically caution against underestimating the amount of work involved with running a rigorous deal process alongside the day to day need to run the business.
In our experience, transactions will normally progress more smoothly and lead to better results when a quality corporate finance advisor is involved. Most of the institutional investors we know take a similar view.
If so, when and how do we choose them?
The decision should be made by your board, who will likely consider the views of a wide range of stakeholders including non-execs, investors and significant shareholders. It will also make sense to consult with other advisors such as company lawyers, accountants and your wider network. There are many options out there, but the decision to appoint will usually be a function of deal size, sector expertise, geographies, deal fees and personal chemistry with the lead advisors.
Top tip: Please do not hesitate in asking for suggestions and intros as you whittle down potential partners for your deal process.
How can engagement terms and fee arrangements be agreed that reflect our shared objectives?
Typically, corporate finance advisors work on a retainer fee (i.e. an upfront or monthly amount), out-of-pocket costs, and a success fee. There is no market standard for these terms, so they need careful consideration and negotiation. We see many engagement term proposals and can talk through the broad range of fee structures and levels. Particular attention should be paid to ensuring that
- the success fee incentivises not just completion of a deal, but optimisation of the final negotiated position (namely in terms of maximising deal value);
- the scope of work of the advisors and accompanying services levels are clearly agreed in advance;
- the company has the ability to terminate the engagement if things are not working out, while in turn providing the advisor with reasonable comfort that they cannot be cheated out of their success fee by a no-fault termination done once they have lined up one or more potential buyers.
Sadly, not uncommon for companies to be in dispute with advisors about whether a success fee is due, especially amid service complaints. While it may not seem like the best way to start a relationship by negotiating your advisor's proposed terms, it is crucial that these are appropriate from the outset. We would want you to avoid the situation where your advisor has overpromised and underdelivered and yet you are still liable for a six or seven figure success fee. While most advisors will represent good value for money, regrettably we do see these kind of disputes more often than we would like to.
How can we help a corporate finance advisor to represent and advise us as effectively as possible?
There are a few things that help, including:
- Looking to engage early with potential advisors so you can plan timing for a process and ensure that your company is as ready as possible to sail into it;
- Ensuring that company records and affairs are in as good a condition as possible as a deal process is entered into;
- Ensuring that communications and instructions follow an agreed protocol that keeps expectations aligned;
- Engaging in open conversations about strengths and weaknesses, pros and cons of a "deal theory" with your advisors so they have the best shot of landing the pitch to the market; and
- Ensuring that everyone on your own internal deal team is on the same page.
If you would like to talk through any of these issues in more detail, please feel free to contact Charlie Fletcher: charlie.fletcher@mishcon.com.