key takeaways
Corporate advisors and business brokers can be at significant risk in getting their fees paid.
Sometimes clients aren't thrilled to hand over substantial fees for success, advisor or broker fees, and they can often take steps to dispute the amount owing.
Here, we'll be talking about:
- What can go wrong?
- What can you do to avoid this?
- Examples of situations gone wrong.
what can go wrong?
The most common issues we see involve the following circumstances:
Clients who claim they already had a relationship with the other party and, therefore, the broker or advisor did not provide any new service in bringing the two together.
Clients who believe they've done all the hard work following an initial introduction of the parties by the advisor.
Clients who are actively seeking to limit or avoid payments they are required to make under their agreements with you.
Advisors not having express terms in relation to exclusivity.
Advisors not having express terms in relation to the effective cause of sale.
Advisors not having express terms in relation to requiring parties to notify the advisor of subsequent negotiations.
Advisors forgetting to consider the many regulatory issues that can intervene to prevent them from getting payment.
What Can You Do?
The documented relationship between the corporate advisor/business broker and the client is paramount.
Often overlooked is contract administration as the engagement proceeds, changes or looks likely to come to an end through the effluxion of time.
Here are some things you can do:
Ensure your agreement is drafted correctly. "Effective cause of sale" provisions need to be expressly stated. There is a risk that "effective cause" may not be an implied term.
Do not impose a limitation on exclusivity periods or have any conditionality on your fee being paid if the transaction will occur within a certain time. Transactions which are inadvertently delayed may be fatal for the payment of fees to you.
Do not rely on the client acting in good faith. If a client is able to save themselves from paying a fee, chances are they will take it.
Obtain security from your client in circumstances where it will greatly assist your commercial position, including where it is unclear whether the transaction will be completed, as you may be cut out of the loop in the sale or merger process.
Examples of Where Things Go Wrong
Advisor's engagement letters need to be up-to-date and flexible to various circumstances. We often see issues arise where:
An exclusivity period is provided unnecessarily.
The conditionality of how a "completion" or "success fee"' is not appropriately defined and quantified.
No acknowledgements by the parties that a success fee is payable after the advisor has facilitated a relationship, regardless of whether completion occurs within an exclusivity period.
Engagement letters not having an express effective cause provision.
HOW CAN MCW HELP YOU?
We can assist with a range of commercial, structuring and contractual matters, including but not limited to:
template agreements
Closing loopholes in agreements to deter clients from trying to avoid fees.
existing agreements on foot
Advising on the terms of existing agreements with clients to reduce the risk of clients trying to avoid paying fees.
contract administration
Reviewing contracts and risks of drifting in and out of existing contractual terms, seeking variations to existing agreements for changed circumstances, etc.
security
Advice and documentation of suitable and adequate security that does not jeopardise the transaction.
unfair contract regime
We can advise on whether your agreements with your clients are subject to the unfair contract regime and, importantly, whether your clients may be able to allege unfair contract terms are voidable as against your client or create a penalty for you with the Australian Competition and Consumer Commission.
regulatory issues
A due diligence of your firm to ensure that you are correctly licensed for the:
- State or territory you may be subject to in any dispute;
- Advice you may be giving to clients (eg credit licensing, Australian Financial Services Licensing (AFSL); and
- Transactions you are acting on for clients (noting that dealings in shares and units may require an AFSL).
conclusion
Continuing to review, update and innovate how your firm engages clients will go a long way to mitigate these kinds of issues and close those critical loopholes clients use to circumvent payment.
GET IN TOUCH WITH US!
If you require any assistance or have any questions, please fill out the enquiry form below and mention this article for an obligation-free appointment.
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