The Real Cost of Selling A Company
Ultimately, when it comes to selling a business, like anything in life, you get what you pay for. So, what is the real cost of selling a company?
There are various costs involved in selling a company. The first and largely uncounted one is ‘time’. With a process that can last from 9 – 18 months, the process involves the shareholders and management team allocating an increasing amount of time to the sale process. Time invested in the sale process means time not focused on the daily business – so it’s a real (but hidden) cost. That’s why it is so important to invest in ‘getting it right first time’ – i.e. a successful deal.
So, what about the ‘hard’ costs of selling? These tend to fall into the following 3 camps:
For this article we will focus on the fees to sell a company to a 3rd party buyer. Let’s examine each in turn.
Corporate finance / M&A fees
Unless you are really knowledgeable and wish to represent yourself in selling your business, chances are you will appoint a specialist firm to sell the company – i.e. find a buyer and negotiate a good deal.
There are plenty of firms to choose from ranging from specialist M&A firms, investment banks, corporate finance firms, accounting firms, national business brokers and independent business brokers. We are an Exit Advisory Boutique – an M&A firm – so one choice amongst others.
Not all are borne equal, so you need to do your research and understand the differences each will bring. And beware the hype – many of the larger brokers focus on “selling you the dream”, usually by promising to deliver an unusually high EBITDA valuation – which is simply part of the sale process to get you signed up.
Fee structures vary considerably – the larger brokers tend to charge a smaller upfront fee and ‘commission on sale’ – but as most insiders know, their conversion ratios are notoriously low – it’s a ‘pile ‘em high’ approach designed to maximise the number of sellers signing up. The more serious corporate finance / M&A firms such as ourselves will charge upfront and / or retained fees together with fees during the process and on completion.
The simple truth is that a successful sale is largely proportional to the expertise and resource invested into the process. We will invest an average 250-man days of time into a typical project. Expertise costs – and that’s why the most reputable firms charge proportionate fees. Apart from sourcing a good deal, a good M&A firm should be able to substantiate fees by driving the overall value of the transaction up. That’s certainly our experience.
So how much are these fees?
We wrote an article back in 2016 that has largely stood the test of time – please visit https://www.thenonexecutive.com/ma-fees-to-sell-your-business/ for a more detailed overview of the typical corporate finance / M&A fees across the UK.
As you will read, there is little consistency across the market with fee structure. But one aspect is consistent – the lower the upfront fees, the more likely you are dealing with a ‘mass-business broker’ who focuses on quantity, not necessarily quality.
You will need to appoint a commercial solicitor, or lawyer, to handle the sale process. This individual / firm will provide not only the legal documentation required to sell the company, but will also guide you through the sale process from a legal perspective.
Be sure to appoint a lawyer experienced in your size of M&A transaction. There is a world of difference between a conventional solicitor used for everyday personal law – and the corporate M&A world. You may be tempted to cut cost and use your local solicitor – don’t. It is a short-sighted view that can cost in the long run. Sale and purchase agreements (SPA) can run to over a hundred pages including warranties and indemnities that you, as the seller, are on the hook for post-deal. That’s not the time to find your solicitor doesn’t quite cut the mustard.
Every law firm will have different fee levels, but expect that legal costs overall will equate to a minimum of 1% of the overall transaction. Some law firms will fix fees, some won’t. And don’t forget to ask who pays the fees – the company or you, personally. Company sale fees are generally borne by you as the owner – but some fees may be expensed to the company.
Accounting / tax fees
Once heads-of-terms are agreed between you and the buyer, you enter the due-diligence phase. This is where the buyer appoints (usually) external accountants, tax advisors and legal specialists to scrutinise your company.
As well as your legal team (discussed above), unless you have a strong internal accounting / tax team (see below), you will need to appoint one. Your team will be expected to provide the answers to due-diligence questions on your behalf. Having a specialist tax advisor can be beneficial, assisting with tax queries both with the due diligence and the drafting of the SPA. Tax is a big cost – and there is a world of difference to you, as a seller, in the quality of tax advice you may receive.
One note of caution – in our experience, there is a considerable link between the quality of your accounting / tax team and the chances of completing the deal. Or put another way, a “low-level” accounting / tax team is a sure-fire way to potentially scupper a deal. Remember – a buyer is likely to be bigger and able to engage first-class, perhaps even world-class support. Resourcing your team with a generalist level of ‘book-keeper’ support can un-do all the good work to create the deal in the first place. As with the advice given at the beginning – you generally get what you pay for, so don’t assume your internal team is able to take you through the sale process. If in doubt, ask your chosen M&A lead for a second opinion.
In any case, expect to pay 0.5% – 1% of the transaction fees with respect to accounting / tax support.
The Real Cost of Selling A Company: Summary
Overall, the combined fees to complete a successful deal can be upwards of 4 – 5% and possibly higher. The legal, accounting and tax costs are largely unavoidable, but of course, the quality (and price) of the support you choose is up to you.
Picking the right team (M&A, legal, accounting, tax) is probably the biggest single contributor to a successful exit. Yes, you may already have a valuable company. But picking a great team will make that value even higher.
Pick the wrong team and you not only waste money, you waste time – lots and lots of it.