Capittal's view: what you sign with an M&A adviser, exclusivity, tail and exit

Quick answer

Capittal's view is that the mandate letter decides how much your adviser is paid, for how long and on what amount, and that it is negotiated before signature rather than when the first offer arrives. The four points that genuinely move money are the success fee calculation base, the exclusivity period, the tail clause and the list of excluded buyers. The rest of the document is drafting.

What must a mandate letter say, without exception?

The mandate letter is the services contract between the owner and the adviser. It sets out what work is done, on which company, for how long and in return for what. A sell-side mandate missing any of these headings is incomplete.

• Scope of the engagement. What the work covers: valuation, information memorandum, buyer search and approach, due diligence coordination and support through negotiation to signing.
• Deal perimeter. What is being sold: the shares of one company, a group with subsidiaries, a business unit or specific assets. Where there is real estate or a holding company, the mandate states whether it is in or out.
• Term. Start date, expiry date and what happens the day after expiry.
• Exclusivity. Whether the adviser is the only party authorised to run the sale, and with which express exceptions.
• Fees. Retainer, success fee, calculation base and the exact point of payment.
• Costs. Which third-party costs are passed on, up to what limit and who authorises them.
• Confidentiality. The adviser's duty over your information and over the very existence of the process.
• Governing law and jurisdiction. Spanish law and named courts, with no generic cross-references.

A sound mandate fits into a few pages. Length is no sign of quality; precision is.

Why does the adviser ask for exclusivity, and how do I limit it?

Exclusivity is reasonable because the adviser's work runs ahead of payment. Valuing the company, preparing the information memorandum, building the buyer list and opening conversations takes months and is billed, for the most part, only if the deal closes. Without exclusivity nobody carries that risk.

There is a second reason, and it works in your favour. If two advisers approach the same buyer with the same company, the buyer concludes you are on the market out of desperation. Price falls before the first meeting. A properly run process speaks to the market with one voice.

Exclusivity is limited in writing, not by trust. Set a fixed term proportionate to the size of the deal and require any extension to be express and signed. Automatic rolling renewal turns a bounded engagement into an open-ended one. You can add control milestones: if by a given date there is no information memorandum and no approved buyer list, the mandate lapses.

What is the tail clause and how long does it follow me?

The tail clause provides that if you sell to a buyer introduced by the adviser within a set period after the mandate ends, the success fee is still owed. It is a legitimate clause. Without it, an owner could simply let the mandate expire and close two months later with the buyer the adviser had brought to the table.

What has to be negotiated is not its existence but its reach. A reasonable tail meets three conditions.

• Limited period. Twelve months from expiry is a market standard. Twenty-four is already long and thirty-six is excessive.
• Closed list in writing. The tail applies only to buyers actually introduced, identified in a signed schedule updated on the day the mandate ends.
• Evidenced contact. Appearing on that list should require a documented approach, not the mere mention of a name in a meeting.

If the mandate does not provide for that schedule, insist on it. Without a closed list, any buyer who surfaces later can be claimed as an introduction and the argument ends up with lawyers.

How are an M&A adviser's fees structured?

The usual mid-market structure combines two elements. One is the retainer: a monthly or upfront amount covering the preparation work, which in a well drafted mandate is credited against the success fee. The other is the success fee, a percentage of the price payable only if the deal closes.

That percentage decreases as deal size rises: the larger the transaction value, the lower the applicable percentage. This is the classic sliding scale, and it reflects the fact that the work does not grow in proportion to the price. The specific figures depend on size, complexity and the perimeter of the engagement, and we deal with them in the dedicated fees article on this blog.

What the mandate should pin down is the mechanics: when the success fee accrues, when it is invoiced and whether the retainer paid is credited against it in full. Accrual must be tied to completion, not to signature of the letter of intent.

Where do you actually lose money in a mandate?

Not in the percentage. In the base that percentage is applied to, and in three clauses almost nobody reads twice.

• Enterprise value or share price. Calculating the fee on enterprise value is not the same as calculating it on the price of the shares. If the company carries debt, the gap between the two comes straight out of your pocket.
• Assumed debt. Check whether financial debt taken over by the buyer is added to the fee base. In a leveraged company that single detail changes the fee substantially.
• Earn-out and deferred price. Define whether the fee is calculated on the maximum theoretical price or only on amounts actually received. Paying fees on an earn-out that is later missed is the most expensive mistake in the document.
• Timing of payment. Link fee payment to actual receipt of the price. If you are paid in three tranches, the adviser is paid in three tranches.
• Minimum fee. Many mandates set a floor regardless of the final price. That is reasonable on smaller deals, but it must be a known and proportionate figure, not a surprise at closing.
• Third-party costs. Lawyers, tax advisers, data room and travel are paid separately and borne by the seller. They should carry a cap in figures and prior written authorisation.

Can I carve out buyers I was already talking to?

Yes, and it has to be done before signing. Carve-outs are agreed in a schedule of excluded buyers, each named by its exact corporate name.

Three cases are typical: the competitor who had already approached you before you appointed the adviser, an existing shareholder wanting to buy the rest of the capital, and the management team in an MBO. In these situations the usual outcome is not a full carve-out but a reduced fee, because the adviser still values, structures and negotiates the deal even though the buyer did not come from him.

A carve-out with no date attached is worthless. A competitor who called you three years ago, with no live conversation since, is not a carve-out: it is an attempt to hollow out the mandate. Document each prior contact with its date and its email, and attach it.

How do I get out of the mandate if it is not working?

Every mandate should contain a written exit. The standard is termination on notice, between thirty and sixty days, with no need to give cause, plus immediate termination for the adviser's material breach.

On exit, fees accrued to date are settled, the information handed over is returned or destroyed, and the list of buyers contacted is closed in writing. That last point is what prevents litigation: without a signed list, the tail clause remains open to interpretation for as long as it runs.

Some signals give away a badly drafted mandate and are worth spotting before signature.

• Automatic renewal for equal periods with no express act by the client.
• A tail longer than twenty-four months, or with no schedule of introduced buyers.
• A success fee base defined as the value of the transaction, with no further precision.
• Recoverable costs with no cap and no prior authorisation.
• No termination right in favour of the client.
• A success fee accruing on signature of the letter of intent rather than on completion.

What is the next step if I am about to sign a sell-side mandate?

Before signing, ask for three things in writing: the schedule of proposed buyers, the exact definition of the success fee calculation base, and the literal wording of the tail clause with its associated list. With those three pieces on the table, an hour of review with your lawyer avoids the argument that otherwise turns up on the day of closing.

At Capittal Transacciones we work on the review of mandate terms within the confidential valuation we prepare for owners considering a sale. We are a mid-market M&A boutique operating in the approximate range of 3 to 250 million euros, with eight offices in Spain (Barcelona as headquarters, Madrid, Girona, Lleida, Tarragona, Palma, Zaragoza and Valencia) and we are part of the NRRO group. The partner handles each mandate directly, including reading the mandate that has been put in front of you.

Keep reading

• Guide: every decision you face when selling your company
• A buyer asks for exclusivity, should you grant it?
• How to sell without your competitors finding out

Review your mandate before you sign it: talk to Capittal