Chapter 4

Working with advisers

Introduction

Buyers do not have to use advisers. The reason they do is that advisers bring experience, expertise, extra resources and objectivity to a difficult strategic exercise that most companies do not undertake on a routine basis. To get the most out of advisers, however, they need to be managed.

Who does what?

Table 4.1 shows the advisers that a buyer might be use at each stage of the acquisition process. Acquirers may use some or all of these depending on their own experience and expertise, and the complexity of the transaction.

The role of business consultants is to help create a business strategy in which acquisitions are seen as a strategic tool to reinforce the strategy. The strategy provides logic for identifying target companies.

Corporate financiers appear in most of the subsequent stages of the deal process. They will tend to be lawyers or accountants by training, have some sector specialisation and be experienced in originating and completing M&A transactions. They usually work on the basis of a small retainer plus a success fee. The success fee gives them a strong incentive to get the deal done, which is itself an incentive to be involved only when there is a deal in place that is likely to complete. For this reason, they are not particularly motivated to carry out acquisition searches which may, or may not, lead to a transaction. Their role in target investigations is as project manager or co-ordinator, which can be very important in large, complex transactions. They are first class at building financial models for valuation and deal-structuring purposes and good to have alongside during final negotiations as support, a sounding board, a second pair of eyes and giver of advice.

Acquisition search consultants need a clear research brief, a statement of the work to be carried out by both sides and a specification of the outputs required. Otherwise, especially in fragmented or difficult sectors, you run the risk of results not coming up to expectations with, at best, the M&A equivalent of ‘find me a three-bedroom house in the south east of England’. Consultants can be used for a single exercise, or they can be briefed to monitor a sector for the availability of companies going through changing circumstances.

A single review of a sector for targets is best conducted when time is of the essence, a framework is required for comparing one or two targets which have already been identified, or to confirm that no unknown opportunities exist and therefore that resources are best redirected elsewhere. On other occasions potential acquirers ask market or strategic consultants to conduct a ‘pre-exclusivity’ due diligence study of a target. This is a very powerful tool for getting an in-depth view on the deal’s potential and the price that might be paid, but can only be justified on a cost basis when the acquirer has good reason to believe that a transaction is possible.

Lawyers and/or corporate financiers may be used in preliminary negotiations for drafting documents such as confidentiality agreements or heads of terms and for general support during the negotiations themselves.

Help with integration is needed most when the deal is done but the need to move quickly with integration means that planning should take place early on in the deal process, and if carried out before due diligence kicks off, can feed questions into the due diligence process. There are specialist integration consultants who, if they are to be used post-acquisition, should be involved at the planning stage.

Most deals will involve financial, legal and commercial due diligence. Depending on the transaction there may be a host of sub-specialists involved from environmental to operations, insurance to tax.

Accountants and corporate financiers are experienced business modellers and would be profitably involved at the valuation stage. This is not to say that valuation is just a mechanical, spreadsheet-driven financial exercise. There is far more to it. Above all, it should include the outputs of both integration planning and due diligence.

Finally, final negotiations can be fast-moving fraught affairs. For this reason it is a good idea to bring a ‘friend’. Corporate financiers, accountants and lawyers – depending on whose judgement you trust the most – are all qualified to fill this role.

Before involving advisers

Managing advisers is like any other form of project management. Forward planning is necessary to decide what is needed, from whom, by when and in what form. Preparations for working with advisers will include:

• Discussing the proposed acquisition, especially due diligence, with those most likely to be involved in and affected by it
• Ensuring that everyone who needs to be is clear about what is going to take place between now and completion, the advantages of bringing in advisers and what they are expected to do
• Setting up a management team with a team leader who has the authority to make decisions during the process
• Deciding who will prepare and agree the initial brief(s)
• Deciding who will choose the advisers and on what criteria
• Deciding who will be the main contact for advisers
• Deciding how you want to be kept in touch with progress.

When to involve advisers

Give advisers as much time as possible and involve them as early as possible. Even if the deal has not been finalised it is still worth calling them in. They can begin to plan their work, think about putting a team together and even start some background desk research. Involving advisers early also allows you to pick their brains. Advisers are experienced in their respective fields so, for example, time spent with them thinking through terms of reference in the early stages will be time well spent. It will help you decide what you need, when and from whom. However, do not:

• Let the process start until you are sure of what you need and from whom
• Let the adviser dictate the scope of the work.

The other side of the coin is that if you involve advisers late, they will charge more – because they know they can.

It also pays to consider the sequence in which advisers are deployed. Corporate finance advisers, if there are any, will be involved from the beginning. The legal team is probably going to be quite expensive so it is pointless letting them start if there are still some lingering doubts about the deal.

Selecting advisers

The most reliable way to select the right advisers is to find key advisers and, over time, build personal relationships with them. Take time to meet advisers. Ask for references from previous clients to understand exactly what their role entailed and how they performed. If you take the time to build working relationships, advisers will get to understand your business and your long-term strategy.

Personal chemistry is as important as technical ability and experience in choosing advisers. Honesty and integrity should also be important selection criteria. What every acquirer wants is an adviser who is looking out for the acquirer’s best interests and who is not just interested in getting a deal done in order to earn a fee.

The advisory team

Although the reputation of the adviser firm is important, the individual qualities of the advisory team are most important. A buyer is going to look to these individuals for good advice in a period of great stress. In many professional firms, work is pushed down to juniors after it has been sold by the experienced senior partner. Buyers should make sure they get appropriately experienced advisers for the work required. It is a good idea to meet the advisers’ teams and verify that their experience is at the right level. Watch for team changes. Lack of continuity during the process may mean other assignments are more important to them and that junior staff are being assigned to your project instead. Difficulty contacting senior team members may well confirm this.

Briefing advisers

Advisers cannot be expected to turn in a half decent job unless they know what is going on. Checklist 4.2 is a summary of what they need to know.

The above means that buyers must think very carefully about what work they need doing early on in the process. If the potential acquisition has been properly researched and the rationale for its purchase evaluated then the issues should fall into place fairly readily.

At the end of the briefing it is a good idea to test advisers to make sure they have understood the situation. They are not experts on the buyer’s business and should ask plenty of questions. Treat it as a warning sign if they do not. If advisers claim previous work in the sector gives them a certain level of expertise, probe just how relevant it is, especially amongst the individual team members.

Terms of reference

Establishing written terms of references is one of the most important aspects of working with advisers. What you expect each specialist to do, by when and for how much, should be properly reflected in writing. First, you will not wish to pay two or three advisers for investigating the same areas. All too often advisers will duplicate each other’s efforts, or try to improve on the efforts of another adviser, if their respective roles are not properly defined. Second, if all the work being carried out is not properly co-ordinated, it is quite likely that something will fall between the cracks.

A written engagement letter for each adviser should set out:

• The scope of the work to be carried out: incomplete scope is often a major obstacle to getting the best out of advisers
• A clear demarcation of responsibilities, possibly showing how one adviser’s brief fits with another adviser’s work
• To whom the adviser owes a duty of care
• The timetable: it is not clever to give false deadlines – by squeezing days out of an adviser’s process you are limiting its thinking time and ability to give you valuable insights
• Whether an interim report or presentation is needed
• Fees, including abort fees if the deal is terminated early
• Headings to be covered in the adviser’s report
• Who will manage the assignment
• Confidentiality
• The rights to the results
• Assignability of the results
• Liability insurance (if appropriate).

Fees

Negotiate fees upfront and push for work to be carried out on a fixed-fee basis. While it can be difficult to estimate how many hours some activities will consume, it is really up to advisers to get their estimates right and therefore a buyer should be reluctant to vary fee levels unless there is a change in the scope of work or delays outside the adviser’s control. In the event of either of these scenarios, it is up to the adviser to convince the buyer of the need for additional fees.

Generally speaking, you get what you pay for and the choice of adviser should not be overly price driven. On the other hand, a firm of advisers will try to charge what it thinks it can get away with. It is worth haggling and it is worth talking with people in other companies who have recently done deals to find out what sort of fees they paid (and whether they thought them reasonable).

Contingent fees are common in acquisitions. Here the exact fee charged depends on whether or not the deal completes. The usual arrangement is for there to be a discount on the fee if the deal does not go ahead and an uplift if it does. How much the fee varies around the ‘normal’ is really up to the adviser and the buyer to negotiate. Contingent fee arrangements can vary from a small up/down right through to 100 per cent success fees (i.e. nothing if the deal does not complete but a considerable uplift if it does) with corporate finance advisers. Although contingent fees are a good way to minimise costs if a deal does not go ahead, they do give the adviser a vested interested in painting a positive picture.

Sometimes advisers are paid on a success fee only basis where the fee is a percentage of the transaction. Not only does this give advisers a huge vested interest in the deal going ahead, but there is something not quite right about advisers getting more if they get the acquirer to pay more for the target. There are ways round this, though, like advisers being paid a bonus based on savings below a ceiling target price.

Information about adviser fees is fairly sparse. Fees increase with the size of the transaction, but not in direct proportion because small deals are not proportionately easier to transact than big ones. As a very rough rule of thumb expect overall fees to be about 5 per cent of the transaction.

Liability caps

Some advisers seek to cap their liability. Liability caps seek to limit the extent of an adviser’s liability should the client succeed in establishing that it has been negligent. The basis of these liability caps varies between firms and indeed not all firms try to impose them.

At the very least, the prospective client is owed a full explanation of why advisers deem it necessary to cap their liabilities. If the buyer is not satisfied, it should say so and perhaps go elsewhere.

On appointment

Checklist 4.3 covers the appointment of advisers.

Day-to-day management of advisers

You are employing advisers for their expertise and opinions. Managing them too closely can be counter-productive if this is too heavy handed. On the other hand, there needs to be a proper co-ordination to get full value. First, advisers should be encouraged to collaborate as far as possible. For example, the commercial due diligence team will be keen to find ex-customers to interview. The financial due diligence team may well have customer lists going back a number of years. Second, advisers must talk to any specialists you may have in-house, such as tax people. They have the great advantage of understanding the business and being able to speak the language of the specialist. Third, someone needs to make sure nothing falls between the cracks. Potentially, external advisers may consist of corporate financiers, lawyers, accountants, corporate investigators, environmental specialists, property surveyors, actuaries and patent/IP specialists and, possibly, the same categories of advisers in several different countries.

At the end of the process it is obviously key that the client understands the issues raised and the commercial impact of what has been said. One of the great M&A disasters (Atlantic Computers) occurred because the buyer did not take proper notice of the target’s ever-growing liabilities even though these had been discovered in due diligence.

There should also be regular communication with advisers with reasonably regular updates as the process goes on. If nothing else, this allows you to:

• Communicate changes in your priorities
• Identify significant issues as they come up
• Make sure all advisers’ efforts are co-ordinated.

In addition, hold regular meetings internally so that the commercial impact of what is being discovered can be properly assessed, questions can be raised and fed back to the advisers and areas where further work is needed can be identified.

The final report

Where a final report is needed, it pays to specify what you want. Advisers know better than anyone else that they cannot be sued for providing too much detail. Reports should be user friendly and contain an executive summary. The executive summary is the most important chapter as this is the only part many recipients will actually read.

Before the report is circulated you should:

• Check its accuracy and conclusions.
• Consider if you have got what you asked for, in the form you wanted it, and its value to your decision making.
• Discuss the report and its implications with your advisers, and negotiate amendments or additions where the report fails to meet the agreed brief.

When satisfied, ask for the written report to be presented. The presentation gives you the chance to look the consultants in the eyes and get them to give you definitive answers they may have hedged in the report. This is also the chance to get their firm opinions. If you have hired the right team, you will have a group of highly experienced business analysts who have painstakingly trawled through many different transactions. Their experience is what you are paying for.

Conclusion

Advisers need to be actively managed to get the best out of them. Being careful to select the advisers that are right for you and for the intended transaction helps but, as with the management of any project, actively managing means deciding what is needed, from whom, by when and in what form, briefing advisers thoroughly on the overall objectives and their role in achieving them, then managing the effort to make sure the various specialists deliver. Involving advisers early on is a good way of tapping into expertise in the planning phase, and making sure they work together in the doing phase promotes both efficiency and effectiveness.