Fees, Fees, and More Fees
While watching the Sopranos tonight, I saw the magic manilla envelope stuffed with cash get passed to Tony and thought “what would a good deal be without some fees?” Remember – it is important to make sure that the lawyers and bankers can afford their fancy sports cars.
A letter of intent will usually be explicit about who pays for which costs and what limits exist for the seller to run up transaction costs in the merger. The transaction cost associated with an agent or banker, the legal bill, and any other seller-side costs are typically included in the transaction fee section. While it’s conceivable that the buyer will punt on worrying about who covers transaction fees, in today’s M&A world most savvy buyers are very focused on making sure the seller ends up eating these, especially if they are meaningful amounts.
Occasionally the concept of a break up fee if the deal doesn’t close, or the seller executes a deal with another buyer, comes up. This is rare in the context of private company VC-backed M&A but prevalent in the context of public company M&A deals (where one public company is acquiring another public company.) We generally fight any request of an buyer to institute a break up fee and tell the potential buyer to rely on the no shop clause instead. Most buyers of VC-backed companies are much larger and more resource rich than the seller it seeks to acquire, so it strikes us as odd why the buyer would receive a cash windfall if the deal does not close, especially since both parties will have costs incurred in the process.
No matter how you structure things, most fees end up coming out of the seller’s proceeds, so tread carefully.