What type of M&A mandate to sign?

In this article we want to give information on what type of M&A contracts (‘mandates’) we see in the market. We want to get a discussion going with M&A advisors to hear their opinion and feedback on this subject. In the end this should help business owners to understand what the different contract options are when they want to sell their company. It should also give business owners an idea of the possible consequences when choosing for a specific type of contract.

With this article we want to help business owners. We want to give them an objective opinion of the importance of the type of mandate they chose. The document outlines why a written, exclusive and retained mandate can be the best choice if you are serious about selling your business. Our recommendations and comments are based on our experience with hundreds of cases, large and small. In the end it is the decision of a business owner to choose the type of mandate he or she prefers and face the consequences of this choice.

This article about the type of M&A contracts consists of the following items:

  • What is a mandate or engagement letter
  • Type of fees (retainer and success)
  • What type of mandates exist in the market
  • Reasons for owners to resist to exclusivity
  • Consequences and risks of different type of M&A engagements

First I give a short introduction with some basic elements of mandates that are probably obvious for most M&A advisors. However, for business owners it can be the first time that they see these phrases. Therefore I do start with a description of some crucial items that are often used in contracts for international business sales.

What is a mandate or engagement letter?

A M&A advisory engagement is an agreement for the provision of M&A services. In industry jargon it is usually referred to as a “mandate”, because shareholders, or the board of directors of a company, delegate specific tasks to the advisor and authorize him/her to perform these tasks on their behalf. In plain language, the engagement, or mandate, tells the advisor clearly what he is expected to achieve, in what manner he may represent his clients, for how long he is authorized to do so and finally, how he is to be remunerated.

Type of fees (retainer and success fees)

In the end there is really only two type of fees. The retainer, which is the upfront amount that needs to be paid before the M&A project can start and the success fee that is paid when the business is finally sold. There is a lot more payments that can occur but they come down to a fixed or a variable fee and can be considered a sort of retainer or success fee. Sometimes we see milestone payments that depend on certain milestones in the process being achieved. For more details on the steps in the process of a business sale please visit the page process of a business sale or request the download of the business sale process. The success fee is normally a % of the sales price of the company (enterprise value or equity value).

Type of mandates we see in the market

Here some examples on the type of mandates we see happening in the market:

  • Retained and exclusive sell side mandate
  • Sell side mandate paid on milestones
  • Mandate without exclusivity
  • Success fee only mandate
  • Verbal agreement

A large number of M&A advisors I know only executes retained and exclusive mandates. These are exclusive mandates with an upfront or monthly payment to the advisor. An alternative can be that fixed amounts are being paid when specific milestones are being achieved. Non-exclusive mandates occur as well. There is still a lot of variety in the business sale processes behind non-exclusive mandates. Owners can try to sell the company their selves and the number of advisors involved can be small or various. We see a lot of business owners that don’t want to pay an upfront commission and only want to pay for a successful sale. More details related to this type of agreement can be found below. Finally we hear about verbal agreements that business owners make with advisors.If you are a M&A advisor please give your experience below about the type of mandates you see happening in the market. Further, please also give your thoughts about the type of mandate you favour as an advisor.

Reasons of owners to resist to exclusivity in a mandate

Exclusivity means that only one advisor works on the sale of a company. This advisor has gotten exclusive rights, via a condition in the engagement letter to help in selling the company. There is many business owners that resist to exclusivity. These are the main reasons we hear of business owners to resist to exclusivity:

  1. Fear of loss of control
  2. Keep the options open
  3. Not want to rely on one intermediary
  4. Confidentiality
  5. Show me the Buyer

Which other reasons do you see why business owners resist to exclusivity in the mandate?

Which reasons do you think are valid to resist to exclusivity?

  1. Fear of loss of control: Many business owners think that if they sign a mandate, they will lose control.
  2. Keeping your options open: Maybe you are not too sure if you want to sell and just want to see what kind of offers you can get.
  3. Not want to rely on one intermediary: Would you like to be able to sell your business on your own, engage several intermediaries or maybe change the advisor in a later stage?
  4. Confidentiality: A written mandate always incorporates suitable confidentiality clauses so confidentiality should not be a reason not to sign an exclusive mandate.
  5. Show me the Buyer.... : Some prospective clients indicate that if a suited buyer is presented a mandate will be signed exclusively for that client only. The question is if this is a lack of trust in the qualities of an advisor or a fear of a seller to truly start a sales process.

Consequences and risks of different type of M&A engagements

There are clear consequences of each type of mandate you give. Here I want to describe a few cases and the possible risks you run. Also I write something about the possible consequences that might occur when choosing a specific type of mandate:

  • Give a non-exclusive mandate
  • Sign a mandate with a success fee only
  • Verbal agreement only
  • Give an exclusive retained mandate

Give a non-exclusive mandate

In case of a non-exclusive mandate it is important for an advisor to know how many others are working on your case. If there is many advisors involved it obviously becomes less interesting for each individual advisor. Hence, you run the risk that an advisor is losing it’s commitment. If you don’t overdo it with too many intermediaries, non-exclusivity may still be acceptable to a M&A advisor. This type of mandate might work out well if you know the value of your company in detail, have good negotiation skills, have sufficient time available and just need contacts to interested buyers. However, be aware that your sales process might become unstructured and not go exactly as planned.

Sign a mandate with a success fee only

Many business owners state that they prefer a very simple mandate which mostly means that they prefer to sign a “commission agreement” and not a M&A mandate. However, selling a business, even a small one, is never a simple matter. If you sign a mandate on a success base only, an advisor is not paid a fee for services rendered. Not via a retainer nor on a per hour basis. You run the risk that a M&A advisor sees this as undertaking free “market research” on your behalf. In this case it is possible that he or she will not devote too much time on your case. You get what you pay for is an expression an advisor might use! If you manage to do a deal you have saved a retainer, but if you are not successful you have wasted a lot of time. The question is if saving a retainer is worth the effort in what might be the most important transaction of your life.

Verbal agreement only

A verbal agreement is something we come across rarely. In the best case there is a very strong amount of trust between the advisor and the seller. This can happen if the advisor and buyer are close friends. Alternatively the seller does not want to formalize the agreement for whatever reason. The consequence is that you, as the owner, lose control of the process. If you don’t sign a mandate, you run the risk that someone approaches whoever he or she wants, says whatever he or she likes and possibly misrepresent you – willingly, or not.

Give an exclusive retained mandate

Many M&A firms or advisors will only accept exclusive mandates. In their view, an exclusive mandate is better for both sides as it gives clarity to all people involved. It improves the chances of a successful sale and can make the duration of the mandate much shorter. Advisors think their efforts deserve a retained mandate. They do market research, shortlist possible buyers, check them out and approach them. An advisor presents the basics of the transaction to a buyer and if they are seriously interested, the seller is assisted in negotiations.

Further, before starting the business sale process, retained advisors study the business in-depth, perform a valuation, advise you on how to prepare your business for a sale and prepare all the presentation material that is needed.A professional needs to know that you are committed to a sale and that you are willing to put this in writing. Informal, verbal agreements give advisors the message that you are not yet ready to sell. Also, since most of the rewards come from closing a transaction, this also means that an advisor needs to do a lot of work. Hence, any formal commitment on your part that fees will be paid is a strong requirement. This is why an advisor prefers a retained, exclusive mandate as this shows most commitment from a seller’s perspective.I hope this document is useful for any business owner. I would encourage all M&A advisors to give their opinion and feedback below this article. Some questions I would like other M&A advisors to answer are:

  • What are your experiences with the different type of contracts that occur in the market?
  • What type of contract do you prefer?
  • What do you suggest to business owners when you talk about the mandate you propose?


Comments

Marios Argyris | Friday 7 November 2014 | website: www.dealmasters.co
Two points: First, as M&A Advisors, we need to educate our clients. Even highly professional, corporate clients, usually do not appreciate how much work M&A entails especially if they were not involved in M&A before. Second, we need to ensure that the client shows commitment and is not using us to provide free services. This means that (a)the client should definitely sign a mandate and (b)that at least the basic tasks needed to execute an M&A assignment are paid by client upon delivery, e.g. valuation, deal structuring, executive summary & teaser, term sheet and so on. These require a lot of high-value-added work-hours, which we cannot provide for free. And we reduce our success fee to reflect the fact that the client is taking some of the risk and not passing all the risk to us.

Manfred Moschner | Monday 10 November 2014 | website: www.acsvienna.com
Thank you, Govert, for giving a concise survey on the subject. Feed-back from our experience: A client who is not willing to honour an M&A advisor's work, will try anything to prevent paying a success fee, should success take place. Only exception: finder's fee by buyers who are approached unsolicitedly, and who only pay for the contact, but want to do the deal-work themselves.

Manfred Moschner | Monday 10 November 2014 | website: www.acsvienna.com
Another comment on commitment: Why should any advisor commit time and resources when a client does not commit to a certain result? Which can only be achieved with his consent. "Working for free = success-fee based" only makes sense in cases where the final result is at the sole discretion of the advisor, i.e. - the advisor has full power of attorney to conclude the intended contract - at a pre-defined price based on previous evaluation. Practically, I have never seen this situation in 30 years. Thus, I stick to clear worktime compensations. With any other solution, I would feel abused by the own client. PS: In a full-scale M&A-transaction (whether buy- or sell-side), the "intermediary element" represents less than 1% of the overall solution. Why shall any advisor risk 100% of compensation (if purely success-fee based) for 1% of workload???

Carlos Ratto | Wednesday 12 November 2014 | website: www.gtallp.com/
Agree with Manfred, we avoid working in deals with no retainers for the same reasons he mentioned. Said that, we see this as a first filter, but we still try to be sincere with us and prequalify deals so as we just get in the ones that have a good chance of closing as this is the way that we ultimately make the money. Part of our work as advisors is to follow the market so as we can form an idea on whether a company is sellable (if we are on sellside) or if it is possible to make acquisitions in a certain market according to a critieria (if we are on buyside). Hope it helps, Carlos

Antoine Moser | Thursday 8 January 2015 | website: www.portapiu.nl
Good overview Govert! Obviously you might also have the optrion that some clients like to offer that the paid out retainer, in case of success, is with drawn (whole or partially) from the succes-fee. regards, Antoine

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