Apohan Corporate Consultants Private Limited

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Brokers in M&A

COMPLEX CHAIN OF BROKERS & NO DIRECT ENGAGEMENT WITH M&A CONSULTANTS

Many SME businesses mistake the deal brokers for merger and acquisition consultants. Brokers are not able to carry out any scope of work in the hectic process of M&A. They have an invisible expectation of success fee (as a percentage of deal size) instead of finding fee or referral fee (a few thousand rupees). This increases the cost of M&A transaction if an agreement with them is made & that too exclusive! Further, brokers delay the process by engaging in prolonged negotiations for their own fees with M&A consultants, investment banker, investor representatives & investment institutions.  Many a time, the chain of brokers, M&A Consultants, representatives of buyer companies and investors becomes so long and complex that they can’t reach an agreement on how they will share the Consulting charges and fees charged to the investor to the business. We have seen a chain of 12 people interested in brokerage/consulting pie which obviously couldn’t work! They have no standard templates of contracts and no principles governing sharing of scope and fees. Many are newbies & learn during transaction creating time gaps & mis-communications! Most of these brokers are knowing only one or two investors who might not be interested in the deal. Thus completely halting the process. Brokers look attractive problem solvers to SMEs as they agree for a “completely” success based contract with the business even for small size of investment. Since they have no role other than attending a few meetings, they are never at a loss. However, this leads the business person to believe that the merger and acquisition consultants seeking retainership fees are off-market, pricey and unaffordable. When brokers don’t solve problem for months together, businessman develops despair on utility of equity funding efforts.

The brokers increase cost of deal, they increase resentment among professionals who do all actual hardwork, they take wild profit for  virtually no work & they delay (just don’t let it happen) the deals by increasing the number parties, their contracts, communications, etc!!! So check the competencies, credentials, expertise & network first before hiring brokers. Pay them fixed referral fees and don’t let it exclusive mandate.

BROKER’S CHARGES:

 

The small businesses engage brokers mistaking them as merger and acquisition consultants. In order to grab the opportunity quickly, they do not seek any retention fees and promise to work on only success fee. However, they increase the cost of transaction and delay the time frame by first making the investment bankers and the merger and acquisition consultants agree to their terms. Rather than advertising the opportunity more, they keep it close to chest.  An attempt should be made to directly engage the M&A consultants, investment bankers or investors themselves.

When a business seeking equity investment or a sellout (100% sale) approaches & engages brokers who don’t know M&A process & also don’t know investors, they create a chain of interested parties who charge both the seller & buyer. Sometimes the chain between the buyer and the seller becomes as long as 10 intermediaries. This leaves hardly any money for the people who actually work. The role of all the people connecting the buyer and the seller cannot be undermined, but they should not be paid any success fee as a percentage of the transaction amount. They should be paid a fixed finder fees.

How to engage brokers in M&A deals?

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