May 14th, 2021 • Ondřej Fryc
I know, I know, I am taking my time with finishing the series. Sorry! Maybe it would be easier for you to get a professional investor, who will do all that for you 🙂
So. We know already what the advisor does. I remember when we first sold Mall, Jefferies sent two people from London who camped with us three months before even producing a teaser, let alone information memorandum! Those three months we were building a story, we cut into the plans left and right to make everything fit and for the whole management to know it by heart and be able to withstand expected roasting.
And now, how much is this going to cost us? Generally speaking, you pay a) a retainer, b) success fee and c) process cost.
Retainer is a monthly recurring cost, which is paid regardless and should cover the cost of the advisor (mainly people cost and opportunity cost). It’s sort of a safety net for the advisor, so that they do not lose big with you. They are not making any money on retainer. It would be a sign of desperation for the advisor to take gigs only for the retainer. You pay it usually for a limited time only, say six months, which is about the mean time needed for a transaction. With large or prestigious transactions, the retainer can be even waived, if the advisor sees a low risk of the transaction not going thru. With Czech boutiques, count with 100-200 thousands CZK, foreign ones start at 50 thousand EUR.
Czech boutiques are typically looking for making higher millions or lower tens of millions CZK in a single transaction. Foreign M&A boutiques start at 1 million EUR and really good advisors and investment banks expect to make north of 3 million EUR. From this expected revenue the success fee negotiations start. It’s typically a percentage of “EV” (enterprise value) and we definitely recommend to setup a motivational tiering.
Process cost means various travel cost, legal cost, virtual data room cost etc. It’s advisable to “cap” this cost (limit it’s value), or retain a right to approve cost over certain value, so that the advisors do not needlessly travel the world in first class seats.
When all of this is negotiated, the advisor will send you a mandate contract, or engagement letter. You are looking forward to the transaction and all this paperwork is tiring, understandably. And the advisor will also push you in this direction. It’s just a signature and we can get to it! But the devil is in the detail and this contract is very important. The interesting points are: What if the company does not sell? Some advisors collect their fee even for cancelled transaction, when the term sheet was on the table. What if the company sells, but not thru the advisor? How long is the “tail” (that is, the term even after the mandate ends, if the company is sold the advisor collects the fee)? It’s not rocket science, use common sense, but it’s worth mentioning that even a “boiler-plate contract” is not set in stone. It’s worth reading it and it can definitely be changed, even though the advisor will present it like it’s nothing special, everybody signs it and no-one had any problems with it before.
So, that’s it for our M&A series for the moment. Give is your feedback and suggestions, if you’d like to know more!
Next time, we’ll talk about something more fun, maybe something from Eduard.
June 4th, 2021 • Ondřej Fryc
Most importantly: as in any job, you can only succesfully play a league you belong to. Goldman Sachs will not sell your local fruit stall network. You need to know what you want to achieve and realistically assess who might have the competence, but also motivation, to help you.