How much does it Cost to Sell a Company?
It’s often difficult to discover just what M&A costs are likely to be, in this episode we uncover just how much does it cost to sell a company.
Understand the various costs involved in selling a company and the types of support you may need to pay for. Obtain a general rule of thumb for overall cost. Know what to expect for your investment and the hidden costs to watch out for.
This is the fifth episode in our second video series, “M&A Deconstructed”. In today’s video we uncover the often hard to discover costs for selling a business and what you need to know regarding payment.
Watch the video below for the in-depth discussion.
Quick find timeline:
00:00 – Introducing “How much does it Cost to Sell a Company?”
00:45 – Overall structure of support required
02:10 – Typical costs for an M&A firm
03:31 – Are M&A costs proportional to transaction value?
04:37 – Typical legal costs for selling a company (M&A)
10:37 – Finance resource required for an M&A deal
11:29 – Financial capability requirements for in M&A
11:50 – Risks of inexperienced financial support in M&A
12:41 – Why invest in the right support in M&A?
Series 2 – Topics
The conversations in the third more technical series of videos include:
- What is a Sales & Purchase Agreement (SPA)?
- M&A Warranties, Representations & Indemnities
- Getting Paid: Earn-Outs, Deferred Payments & Vendor Loans
- What could Derail a Company Sale?
- How much does it Cost to Sell a Company?
- 5 Insider Tips: A Successful Company Sale
In case you missed our first series you can watch the videos on catch up below:
- Introduction to the M&A Deconstructed series of videos
- What is EBITDA?
- What are Heads of Terms?
- Equity Share vs Asset Sale
- Completion Accounts vs Locked Box
- What is Due Diligence (DD)?
Meet your M&A experts
Nick Davies, Partner | M&A Solicitor, Steele Raymond LLP Solicitors
Nick acts for a wide range of business clients across various sectors, advising on complex corporate transactions including company sales, purchases and mergers. Nick also advises on on mergers, de-mergers and re-organisation.
Justin Levine – Managing Director, The NonExec Limited M&A Boutique
Justin leads a boutique exit advisory firm specialising in manufacturing, technology, IT, digital, healthcare, wholesale and distribution markets. With the support of a 15-strong virtual team of analysts and researchers, he helps private business owners with growth and exit strategies.
CONTACTS:
Steele Raymond LLP
Richmond Point, 43 Richmond Hill, Bournemouth, BH2 6LR
steeleraymond.co.uk
TheNonExec Limited
Contact us here to chat about your business exit.
Transcript for video:
What does it cost to sell a Company?
Justin Levine:
So, morning, Nick, welcome back to our M&A Deconstructed series where we’ve covered off quite a number of different topics related to selling a company. Possibly one of the most interesting topics for a seller is how much? How much does it cost to sell my company?
And it’s not so easy to actually find that information out if you are a seller, having not done the project or done a project like that before. Googling it, looking on the web, can produce a plethora of information. So today I think we’re going to talk some headline numbers.
Overall structure of support required
If I possibly just take the lead in terms of giving an overall structure in terms of what a seller might be exposed to cost-wise. Well, the first set of costs might be an M&A firm, corporate finance firm. So this in essence is a selling company using an external firm, an external company, to manage the sales process.
Nick Davies:
To find a buyer.
Justin Levine:
To find a buyer, to negotiate the deal and so on. The challenge that I’m pointing to is that the name of that type of company varies because of course there are accounting firms that sell companies, there’s investment banks, there’s M&A firms, there’s boutique M&A firms, there’s business brokers and, and, and… And the list is quite broad. And they all have their different strengths and weaknesses.
In terms of whether to engage a company to sell a business my recommendation, even though I do that for a living, is always, whether it be us or somebody else, use somebody. Don’t sell a business yourself, especially if it’s a valuable business.
So the first set of costs comes with using, and I’m going to use an M&A firm, (mergers and acquisitions firm). And the cost range can vary enormously. If you’re going to use, let’s say big blue chip bank to sell your company, then the fees can be enormous. If you’re going to use a one-person business broker, the fees are going to be proportionately lower.
Typical costs for an M&A firm
Broadly speaking, and I’m going to segment the market and now talk about credible M&A firms, credible corporate finance firms. When I say credible, people that are experienced, do this all the time successfully. Employee-capable, knowledgeable and experienced people.
The fee structure tends to be bucketed into initial fees to set the project up. A certain amount of money to create the offer memorandum, to do some research and so on. And typically those fees come upfront. In other words, paid right at the outset of starting the sale process.
Some companies charge a retained fee. In other words, a monthly retainer throughout, all the way to the end of the project. Some companies do that, plus they factor in a fee payment when heads of terms are struck. Sometimes the retainer is there, sometimes it’s not. And then very often as not, there is a final payment when the deal goes through.
Nick Davies:
Success fee or similar.
Justin Levine:
A success fee. Sometimes it can be linked as a percentage of the deal. In some, either simple calculation, 1% of the deal value, or some complicated calculation. But in essence there’s usually that upfront fee, usually some retained fees, possibly a fee on heads, and possibly a fee at the end.
Are M&A costs proportional to transaction value?
Justin Levine:
There’s an inverse relationship in the sense that the bigger the deal, from let’s say if we’re starting at a £1 million deal value, going up to, let’s say £20 million, there’s an inverse relationship where actually the fee percentages are much higher at the lower deal value.
Nick Davies:
It’s the same amount of work but for a smaller return. So it becomes proportionately cheaper in a sense, the higher the deal value goes.
Justin Levine:
Absolutely. So if you’re selling a business and the deal value is £1 million, you might be spending perhaps 10% of that, 8-10% of that value in fees, going to your M&A firm that is representing you. And if you sell your business, and it’s a £20 million transaction, it might be one, one and a half percent of that value that you’re paying to your corporate finance M&A lead firm.
Justin Levine:
So it’s very difficult as a broad sense, the bigger the transaction, the smaller the overall percentage fees. But of course, is that you’re effectively starting to pay money right from the outset of the process.
Nick Davies:
Sure.
Typical legal costs for selling a company (M&A)
Justin Levine:
So if we then bring in the legal side and the accounting side, in terms of the process, typically the corporate finance firm or the M&A firm will go negotiate a deal, but at a certain point in the sale process, typically they’ll want to bring in the legal team, SteeleRaymond, for example. And of course, then costs start to be incurred.
Nick Davies:
They do.
Justin Levine:
Perhaps you might want to just touch as a shape of what that might look like.
Nick Davies:
Sure. So we like to be involved early. We like to add value early into the transaction. Quite often that’s by assisting or advising on drafting the heads of terms. We’ve talked in previous videos about the importance of heads of terms and how getting those right can add value back into the deal later. So we think there’s a value in those being legally prepared.
At the point you’ve got signed heads of terms you should know what your deal structure is going to be. And by that I mean, you should know the forms of consideration. You should know the timeframes. You should know the complicating factors, if there are any. And you should be able to make a very decent stab at what the transaction’s going to cost.
We work on hourly rates, as most law firms do. But when we get to the heads of terms stage, we can use our experience of previous deals to give a very good indication of what we think this deal is likely to cost in legal terms. And increasingly we’re finding that clients like to agree a fixed fee, which we’re happy to do, subject to a fixed scope of work and a fixed timeframe, which is fairly typical.
In terms of the quantum and where that can end up, people won’t be surprised to hear me say that it varies. And that’s because some companies are simpler than others and some are more complex, or the deal structure might be more complex.
If we take as an example, a company worth £10 million, one shareholder, one director, no debt, cash on completion, no earn out, no significant property holdings, et cetera. You can see how that transaction is, on the face of it, at least until the DD‘s done, fairly straightforward. So you should be able to agree a sensible and perhaps a lower fee.
If you look at the other end of the spectrum, you’ve got a group which has got six trading companies in it. You’ve got 8-10 directors, you’ve got a split of share holdings, some held by a pension. There’s various things going on in these companies. There’s a number of different property holdings. There might be some ongoing litigation. There might be some other problems.
There might be a complicated payment structure, some cash, some deferred consideration and earn out. There might be some rollover shares. You can see how that deal is simply going to be a lot more complex and time consuming to deal with. The heads of terms should address all of that and you should still be able to predict what the costs are likely to be, but the costs are going to be greater than the one-man company I mentioned a moment ago.
Some factors which can increase costs are multiple properties in a company. A buyer or a buyer’s funder may want certificates of title for all of those properties. Which means, as well as using a team of corporate lawyers, we will need to bring in from other teams, commercial property lawyers. If there are employee issues in the company, we will bring in an employment lawyer. If there are disputes or litigation ongoing, we may bring in a disputes lawyer to offer some advice on that.
So the more stuff that’s going on, the more there is, the wider the team may be. And it’s important to get the right person, the expert on each element of that deal, but that can have an implication for costs.
Similarly, as you mentioned, proportionality of costs on deals. Smaller deals can feel more expensive. The work on due diligence for a smaller company, the questions largely will be the same. The level of forensic analysis or scrutiny may be slightly less, but it may not be. A buyer typically will still want to understand all of the risks. So those costs can feel higher on the lower value company, and more proportionate on the higher value company.
There’s often thrown around a rule of thumb for legal fees, which is broadly 1% of the enterprise or deal value. I think that’s a reasonable rule of thumb. It just varies in every single case. And I think that using the simple scenario I described a moment ago, I would expect deal costs to be significantly less than 1% on a deal of that type. But I think on the highly complex deal which I’ve described, you could feasibly get beyond 1%. And that’s sometimes a helpful rule of thumb.
In terms of payment. If people are selling a company, we know, or we hope, that there will be a completion and that there will be a pot of proceeds at the end. And if a deal’s going to take 6-8, 10, maybe 12 weeks, we try and work to a position where our fees are cleared on completion. That helps people from a cash flow perspective.
If a deal really drags on beyond that, we may need to say, look, we’ve been working for three or four months now, we’ve incurred some cost and we do need a payment to bring that up to date. That can be agreed and addressed at the outset so people know what’s required of them.
If you are acting for a buyer and you are acquiring businesses, there isn’t going to be a pot of proceeds at the end. And typically we’d probably bill on a month by month basis. But again, these are all things which we would agree at the outset. So that’s probably a summary of legal costs.
Finance resource required for an M&A deal
Justin Levine:
Thank you. And I think on top of that, possibly is accountancy cost. So if a seller is selling his or her business, there’s a due diligence process. The buyer is inspecting the company and they’ll be going to be looking at the accounts, the finances, the tax. And of course, the cost that the seller is exposed to is proportional to the level of capability and resource that they have inside their business.
So if they’ve got a good finance director, a good financial controller, chartered accountants on the payroll, then there’s probably minimal external costs that they’re going to have to be expensed to. And conversely, if they don’t have a very strong accounting team internally, it may well be that they do have to subcontract that work to an external accountant. And of course the proportion of cost is directly related to how much work is involved.
Financial capability requirements for in M&A
Nick Davies:
I completely agree. And even where you’ve got an experienced FD and FC in house, those individuals may not have been through an M&A process before. So where they may be very capable at answering the FDD and the tax inquiries, which is fine. Where they may not have the expertise is in the review of the financial provisions in the SPA.
Risks of inexperienced financial support in M&A
Nick Davies:
And things like accounting warranties, tax covenants, which is like an indemnity, are not necessarily enormously complex or technical, but they need a good understanding and they need somebody who has seen them before to review them. The accounting warranties, particularly because those can represent an area of risk, to review those warranties, to review them with an eye to the company’s position, to make sure those accounting warranties can be given. Things like accounting standards, et cetera, et cetera, and if any disclosures are needed or if any amendments are needed.
So even if you’ve got a good FD and FC in house, they may be looking at that SPA document and thinking, oh, well, I haven’t seen that before, and wouldn’t it be good if we used an accountancy firm to review those, who’ve seen it a hundred times before. And I would suggest that the cost of doing that is well worth incurring because it’s protective.
Why invest in the right support in M&A?
And I’ve mentioned before, seller’s remorse. You want to maximise your deal value and you want to make sure you hold onto your money. And the way you hold onto your money is getting the right people to advise on the right parts of the deal.
Justin Levine:
I concur. And I concur in the sense that my old adage is, you get what you pay for in life. Even in these times that we live in, it still stacks up. So…
Nick Davies:
I think that’s right. And I think that people, I forget how many times the average family or people move home. You might do three or four times in your life. For most people who are selling a company, it’s normally the result of almost a lifetime’s worth of work. You will only sell your company once, in most cases. You may buy something else or sell something else. You will only sell it once.
Do it right. Get the best advice. Be absolutely clear when you are signing up, what you’re signing up to and what your risks are and walk away into the sunset with your proceeds, with the least amount of risk and worry that you can.
Justin Levine:
I like the sound of it.
Nick Davies:
Perfect.
Justin Levine:
Thanks, Nick.
Nick Davies:
Pleasure, Justin.
Justin Levine:
Cool.
Nick Davies:
Cheers.
