Exit and Growth Strategies for Middle Market Businesses

What is the Value of Good Advice?

By George Walden | Sep 11, 2014

AdviceI recently had a potential client (the owner of a commercial contracting company) email me and say he wanted to meet to discuss selling his business, but only if I did not charge upfront fees. I responded that I wasn’t interested in being hired without an engagement fee. I thought it funny that a contracting firm would ask for a freebie when every time I have asked for a service from one of them there has been a request for some or all of the money upfront before they would start the work. Below I would like to articulate my thoughts on the subject:

My first thought was professionals deserve to get paid. All lawyers, accountants and other professionals require retainers. I have thirty years of experience doing deals and that expertise has value.

  • I have represented and sold a number of contracting companies and have expertise in a number of industries. I have done enough contracting company deals to have had a few bad experiences-mostly at the hand of the companies themselves. Contracting companies have a number of issues that make them difficult to sell. They tend to be relationship oriented (I do business with the owner rather than the company, low in assets (reduced bankability), and unfortunately regularly use kickbacks as part of their selling process. Bonding further lowers the value of the company because it often goes against the bankability and private equity groups (financial buyers) as a rule will not provide a personal guarantee, which is almost always a requirement for bonding. Knowing this, a wise advisor would look to have relationships with the buyers that understand and have worked through those same issues.

Secondly, charging engagement fees is the norm for the Investment Banking industry.

  • Most investment banks require an up-front fee to show good faith and commitment on the part of the owners. This fee typically between $20K and $75K is regularly credited against the success fee.
  • I would be very concerned about a group that would not charge an engagement fee. It shows a lack of professionalism.

Thirdly, we always have senior talent involved in the process.

  • At CFA we have senior dealmakers on every deal with usually a strong industry practice group to support their efforts.
  • Each practice group is supported by experienced deal makers that have done multiple transactions in that particular industry. If an individual meets up with an unfamiliar issue, there is a team of resources available.

The primary reason investment banks request engagement fees is to show good faith on the part of the owners. It is about commitment. Skin in the game shows the client is serious. The transaction process is difficult and will be frustrating and time consuming for the business owner. If I am going to invest my firm’s time, resources and energy it will only be after the seller has made that commitment to support the sale of his company.

Posted by George Walden.

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