How Much Does It Cost to Sell a Business?

As they continue on their mission to demystify every aspect of selling a business, Nick and Justin explain the costs of an M&A advisor or corporate finance firm, the costs and importance of instructing an M&A solicitor, as well as considering the overall accountancy costs, all of which are necessary components of a successful business sale.

Take a look at this in-depth discussion in the video or read through the transcript below…

Video sub-topic timestamps:

00:55 – Instructing an M&A firm/Corporate Finance firm
03:10 – Success fees
03:30 – Fee percentages in M&A deals
04:48 – How much do solicitors charge for selling a business?
07:48 – Factors which can increase M&A legal fees
09:41 – Agreeing payment terms for M&A legal costs
10:39 – Accountancy costs and fees in an M&A transaction
12:53 – Seeking professional advice and minimising the risks of selling a business

Video Transcription

Justin:
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’re a seller, having not done the project, or done a project like that before, Googling it, looking on the web can produce a plethora information. So today I think we’re going to talk some headline numbers.

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.

Instructing an M&A firm/Corporate Finance firm

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:
To find a buyer.

Justin:
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. 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 that 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.

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 are experienced, do this all the time successfully. Employing 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 up front. In other words, paid right at the outset of starting the sale process. Some companies charge a retained fee. In other words-

Nick:
Throughout.

Justin:
…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 there’s not, there is a final payment when the deal goes through-

Success fees

Nick:
Success fee or similar.

Justin:
A success fee. Sometimes it can be linked as a percentage of the deal, in 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.

Fee percentages in M&A deals

There’s an inverse relationship in the sense that the bigger the deal, from let’s say, if we are starting at one-million-pound 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:
Yeah. 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:
Absolutely. So, if you’re selling a business and the deal value is a million pounds, you might be spending perhaps eight to 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-pound transaction, it might be 1.5% of that value that you’re paying to your corporate finance M&A lead firm.

So, it’s very difficult as a broad sense, the bigger the transaction, the smaller the overall percentage fees. But of course, it’s that you’re effectively starting to pay money right from the outset of the process.

How much do solicitors charge for selling a business?

So, if we then bring in the legal 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, Steele Raymond for example. And of course, then costs start to be incurred.

Nick:
They do.

Justin:
Perhaps you might want to just touch as a shape of what that might look like.

Nick:
Yeah, 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 signs of 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 pounds, 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 eight to 10 directors. You’ve got a split of shareholdings, 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.

Factors which can increase M&A legal fees

Some factors which can increase costs are multiple properties in a company, a buyer or a buyer’s funder, may want certificates 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 is 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 type of deal, which I’ve described, you could feasibly get beyond 1%. And that’s sometimes a helpful rule of thumb.

Agreeing payment terms for M&A legal costs

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 six to eight, 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’re acting for a buyer, and you’re 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.

Accountancy costs and fees in an M&A transaction

Justin:
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.

Nick:
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 says before. So, where they may be very capable of 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 (Sale and Purchase Agreement). 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.. 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 100 times before.” And I would suggest that the cost of doing that, is well worth incurring, because it’s protective. 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.

Seeking professional advice and minimising the risks of selling a business

Justin:
I concur. And I concur in the sense that, my old adage is, you get what you pay for in life. And even in this times that we live in, it still stacks up that, so.

Nick:
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 it 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 something else. You will only sell it once. Do it right. Get the best advice, be absolutely clear when you’re 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:
I like the sound of it.

Nick:
Perfect.

Justin:
Thanks, Nick.

Nick:
Pleasure, Justin. Cheers.

Justin:
Thank you.

_ _ _ _ _ _ _ _ _ _ _ _

More from Series Two of M&A Deconstructed

• Sale and Purchase Agreements (SPAs) in Mergers and Acquisitions
• A Guide to M&A Warranties, Representations and Indemnities
• Understanding Earnouts, Deferred Payments and Vendor Loans in Mergers and Acquisitions
• Why Mergers and Acquisitions Fail (And How to Avoid the Most Common Mistakes)

Take a look at Series One of M&A Deconstructed

As part of this in-depth series, other topics discussed include:

• What is EBITDA?
• What are Heads of Terms?
• Completion Accounts vs Locked Box Mechanism
• What is Due Diligence in Mergers and Acquisitions?
• The difference between a Share Sale and an Asset Sale?

Connect with the M&A experts

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. Connect with Justin >

Nick Davies, Partner and Specialist M&A Solicitor, Steele Raymond LLP
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. Connect with Nick >

Make an Enquiry

If you have any questions regarding your business, a business exit, a merger or any other corporate legal query, please contact Nick Davies on 01202 294566 or email [email protected]