For privately owned middle market companies the sale of a business is often complex, influenced by the type of business, the market, the buyer, deal structure and potential liabilities. Most deals are unique regarding price and price structure, earnouts, escrows, employment contracts for owners, the owners’ personal tax position, intellectual property ownership, business properties and much more. The services provided by an M&A Advisor/M&A Intermediary are typically retained through an M&A Intermediary services agreement structured to take care of all transaction specifics.
It is important that the M&A advisor is enabled to negotiate the optimal deal structure, price and terms and should not be constrained. As such, it is important that the M&A intermediary services agreement supports, enables and ensures negotiating and delivering the best deal is achievable by not “tying the hands” of the advisor.
Large amounts of money are typically involved in middle market deals making it important for the M&A intermediary services agreement to be suitably detailed, covering all contingencies ensuring surprises and disputes are avoided. Although covering all the necessary detail makes the agreement appear somewhat lengthy and onerous, drafting it in plain English using a logical structure makes it easier to understand and review.
Following the initial “pitch” of their services and capabilities, the advisor provides the seller with a formal services proposal. The proposal covers the main terms of engagement such as fees, term, exclusivity and scope of service. After agreeing to the key terms of the proposal, the M&A Intermediary services agreement is reviewed and signed.
M&A Intermediary Services Agreement
The detailed M&A services agreement restates, in further detail, the agreed elements of the proposal. It will make clear who are the parties, fees and their structure, calculation of fees and triggering of payments. A typical M&A advisory services agreement will include the following essential contents:
- Parties – identification
- Terms of Engagement
- Term, termination, exclusivity
- Scope of Services
- General Provisions (Small Print)
- Notices (legal addresses etc)
- Warranties, limitation of liabilities
- Governing law and dispute resolution
Items attracting most attention which are especially relevant are “terms of engagement” and “definitions”. Typically generic, the “small print” receives less attention.
The parties which sell a business and assets or part of a company may be the company itself or shareholders. The sale may include more than one business owned by shareholders or their affiliates. Selling a business property, held in a superfund or trust, may also form part of the sale. All of these details may only be known after an advisor is engaged and the reason why the M&A intermediary services agreement needs to take into all possibilities into account.
For the agreement to be valid, it must be signed by all parties. It will have signature blocks for each party to sign in their various capacities as a director or shareholder. Typically, only directors need to sign if companies have many shareholders.
“Definitions” clarify items in the agreement such as what is an “affiliate”, what is a “buyer” or “prospective buyer”, the meaning of a “sale” or “transaction”, its “completion” and “value”. Many other definitions bring further clarification to the agreement.
Term and Termination
The average sale period for a mid-market company is 9 months, therefore most agreement terms are at least 12 months. The term will also take into account the possibility that a buyer introduced during this initial 12-month term, for various reasons, may only completes a transaction after say 15 months. The period after the end of the term where success fees are still payable to the M&A intermediary is often called the “tail”. Tails are typically 12 to 24 months after the term. Agreements generally have a provision for termination with suitable notice .
M&A Advisors are typically engaged on an exclusive basis for the term, usually 12 months. Exclusivity avoids sending damaging mixed marketing messages. Having mixed dealings with prospective buyers can destroy a deal or its value. Duplicating activities will result in increasing costs. Having an exclusive advisor avoids confusion and possible disputes over the success fees.
Success Fees & Retainers
Most mid-market advisors will require a retainer fee paid in a lump sum in advance or paid monthly. The retainer covers some costs in preparing material and marketing the business. The key attraction and prize for the M&A intermediary is getting paid a “success fee” on closing a deal. Calculating M&A success fees is typically the multiplication of the “transaction value” with a success fee percentage. The success fee percentage can have different structures and payment thresholds based on the transaction value. Success fee structures range from the simple flat fee to more complex formulae such as the “Lehman Formula”. Defining “transaction value” is normally the total consideration the seller will be receiving.
As the deal structure and transaction value are not known when the M&A intermediary services agreement is signed, the advisor will often stipulate a minimum success fee. This addresses possible deals where selling only part of the business may be an outcome, not originally planned. Minimum success fees may apply if the transaction value, for various reasons, is below original expectations.
Where the deal includes the sale of a property, a specific property success fee may be included.
Disbursements and other Costs
The company or seller directly retains financial, tax and legal services with costs charged to the company or seller. Third-party marketing costs including newspaper advertising, online advertising, producing a business marketing video and travelling costs are all chargeable to the company. Called “disbursements” or “recharges”, these costs typically include a 10% recharge fee. Data room providers will typically invoice the Company directly using the amount of data in the data room and length of use for calculating costs.
The M&A intermediary/advisor will provide a brief overview of the services offered which include reviewing the business and its financials, meeting with the company management, reviewing and learning about the industry, preparing documents including the confidential information memorandum and introductory teaser, preparing the NDA, setting up the data room, meetings with prospective buyers negotiating the letter of offer, negotiating the final agreement, assisting with due diligence, managing communications participating in closing and post-closing activities.
Most business sale processes use confidentiality agreements to protect sensitive confidential information. These agreements are between the advisor and their client and between the buyer and the seller. Identifying, managing and using the confidential information is addressed in the M&A intermediary services agreement.
The Small Print – General Provisions
The “small print” which is generally not small, covers key elements such as applicable law and legal jurisdiction, dispute resolution processes, indemnification, limits of liability. It also covers the official notification processes and about the parties and their addresses for notices. The general provisions also cover matters such as “signing in counterparts”, meaning that the parties do not have to sign the same original document, simplifying the signing process. The “small print” also covers the relationships between the parties and survival of the agreement.
M&A intermediary agreements are generally prepared in the best interests of all parties and tailored for the specific sale opportunity ensuring that there are no misunderstandings particularly related to fees and fee structures and have your lawyer review it. A good agreement is a foundation on which the M&A advisors services are based on all parties achieving the best deal value.