Small Firms, BIG Advantage

All right, so you’re going to do a deal.

You find a business… build a solid relationship with the seller… make an offer… negotiate… solicit financing (if your deal requires a closing payment)…

Then sign an LOI (letter of intent, also called a heads of terms in the U.K.) to give you exclusivity to close a deal over a specific timeframe – usually eight weeks.

Once you have your LOI and financing term sheets (also called EOIs or expressions of interest) in place, it’s time to start working with contingent-fee advisers.

Whoa, whoa, whoa – pump the brakes.

You should have (hopefully) started building relationships with these people way before signing an LOI on a deal. Better still – before you even started looking for one.

That’s because contingent fee-based lawyers and accountants are a vital component of any deal.

Even if you are a lawyer or an accountant, or feel confident doing those kinds of due diligence, you should still hire contingent-fee advisers to do those jobs for you.

And there are lots of accountants and lawyers out there.

The most common question I get asked when it comes to hiring contingent-fee advisers is Does it make sense to go with the big M&A (merger and acquisition) specialists or stick to smaller firms?

Which is a really good question.

My preference is to stick to small- and medium-sized firms. I stay away from the Big Four accounting firms – KPMG, Deloitte, PricewaterhouseCoopers and Ernst & Young – or other mega practices.

While mega firms add instant credibility to your deal – and that may be important to you – I stay away from them for the following reasons …

1. Cost

Mega firms are very expensive. Look at the differences in fees on two of my recent deals – it’s staggering.

On an IT security deal I closed with partners of PROX Capital Group (my and Adam Markley’s independent private equity investing firm), our legal fees on the deal were sub £10,000 from a small regional firm in the U.K. I know well.

On another deal I closed, I solicited a larger, London-based firm with experience in that business’s sector. Though similar in size to the deal above, the fee quote was £75,000.

A 7.5X difference in fees is a major issue for any business. Remember, the business you’re buying pays the fees only when the deal closes. Would you rather pay all that money to advisers or keep it for yourself?

Or better still – use the additional funding inside of the business to grow it faster, so it’s more valuable later when you decide to sell it.

2. Level of Importance

If you go to a mega firm, they will likely be closing billion-dollar deals in addition to yours, or at least deals in the hundreds of millions.

If you are buying a $1–$5 million business, you may be a lower priority to the firm than the Googles, GEs and Boeings of the world.

You want to work with advisers who see you as a significant client… who will go above and beyond for you to make the deal happen… and will continue to advise and serve you as the owner of the business.

3. Intimidation

Another reason to go with a smaller firm is to minimize the intimidation factor.

If you are buying a small business from a retiree, they will likely also have small-firm representation. If you storm in with a mega-firm as your adviser, you will massively intimidate the other side, putting unnecessary pressure on the deal.

Let me tell you a quick story about a time I actually walked away from a deal because of adviser intimidation.

An acquaintance of mine was putting together a large roll-up of professional services firms in the U.K. Remember, a roll-up is a bundling together of multiple small businesses to create a larger group and benefit from all the cross-selling opportunities and financial synergies that exist. (This is a great way to rapidly build a lot of shareholder value.)

I was to be chairman of this group and own a good percentage of the group’s shares.

My three partners – people I know well, like and trust a lot – insisted we hire a Big Four accounting firm and top-tier law firm for all our deals. They figured the market would see that as impressive, and it would add credibility to our group.

I massively and completely disagreed with this.

Sellers (generally, but especially so in this particular niche) would have been very intimidated by mega firms. And I wasn’t thrilled about paying monster fees to these firms when I would rather use the cash flow to grow the businesses we were acquiring.

I was outvoted 3-1 and I didn’t feel comfortable with their direction, so I bailed from the deal.

The bottom line is when you’ve built a massive business empire – either organically or via multiple acquisitions – then by all means consider using the mega firms.

However, when you’re starting out, focus on building relationships and use smaller, regional firms.

Bigger isn’t always better – sometimes it’s just bigger.

Until next time, bye for now.

Carl Allen
Co-founder, Dealmaker Wealth Society

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