For M&A Advisors, buy-side representation is inherently more problematic and risky than representing a sell-side client. On the sell-side, an advisor is representing something other people want (always an advantage). When representing the buy-side, we are trying to acquire something someone else owns and perhaps others are interested in too, obviously not as good a negotiating position.
On one hand a sell-side client, a genuine seller, will usually sell to someone, eventually. He cannot take the company with him. Over the course of a sale process at least one prospective buyer is likely to make an offer which may be happily or otherwise accepted. On the other hand, as a buy-side client, a prospective buyer, need not buy at all. Ever! A somewhat asymmetric risk for the advisor naturally influencing M&A fees and their structure!
When representing sell-side clients (see sell-side success fees) advisors know that if they do their homework, collaborate with clients in identifying prospective buyers, someone in the pool of prospective buyers will likely make an offer. Additionally if running a good process, the seller will have the luxury of choosing between several competing bidders. On the, buy-side parties usually focus all their efforts on one would-be seller (one at a time anyway). The buyer will most likely walk away from the deal if a competitive sale process drives the sellers value above a suitable investment value. And of course they should walk!
Another risk is the likelihood that the advisor drills a dry hole, where prices can’t be met, the seller is not genuinely wanting to do a deal and much time, cost and resources wasted. Target companies could be technically “not for sale” i.e. not prepared for a sale process and the deal time-line extends while the seller gets material ready. Where a business is “on the market” or “for sale”, sellers may have suitable sale material prepared and are ready to do a transaction, considerably shortening the transaction time-table.
M&A Buy-Side Fees and Risks
There is a risk of the deal not completing after months of work. Frequently buy-side deals are seen dying just before the goal line. Many factors influencing both buyer and seller are beyond the M&A advisors’ control presenting significant challenges and deal risk:
- Sellers changing their mind, may not be genuine, market conditions change, sellers business deteriorates or improves significantly, new contracts won, contracts or clients lost, seller decides to sell to management, seller receives a better offer, seller drags their feet, health issues with key staff, a key manager leaves…
- Buyers may change their mind, other opportunities arise, family circumstances change, health issues, new priorities, changed view on valuation, target company loses a contract or sales decline, their own company is impacted by some event, new competitors enter the space, changes in the economy or market conditions, lenders do not support the deal, can’t agree on completion documents, cultural differences identified, skeleton found during diligence…
Retainer and Success Fee
As mentioned, the odds of succeeding are far more daunting on the buy-side than on the sell-side and hence M&A buy-side fees are structured accordingly. Fees include a retainer, which covers some basic but not all costs plus a success fee on closing a deal. To manage risk, particularly time, the retainer is typically a monthly fee as opposed to a fixed lump sum. The longer the acquisition process, the higher the risk of the advisor incurring significant losses especially when not closing a deal!
Buyer mandates differ significantly depending on the buyer itself and the purpose of acquiring another business. Trade buyers are able to look at synergies and technology, people and distribution opportunities in markets and products they understand. Financial buyers are looking for a good investment story, its growth opportunities and eventual exit. Both will have a different desire or need to do a deal. They have different price expectation and different chances of success and different risk acceptance and mitigation. Successful trade and financial buyers are typically patient and understand the need to apply sustained resources over a period of time thereby minimising risks, avoiding buying duds and securing suitable targets.
Buy-side representation is arguably more risky for advisors and as such M&A buy-side fees will generally reflect the uncertainty, the risks and the long-term nature of a buy-side engagement.