Legal expenses?

June 29, 2020

by a searcher from University of Texas at Austin in Houston, TX, USA

I am considering a self-funded search, but am apprehensive about upfront legal costs and potential broken deal fees. I was curious if anyone had any i) estimates for legal expenses I can expect and ii) tips for reducing potential legal fee's while still getting legal counsel involved early in the process?

Thank you!

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Reply by a searcher
from Stanford University in San Francisco, CA, USA

For a highly complex deal, the cost could run into the $50-75k. The highest cost deal that I've ever been a part of was over $100k for a particularly hairy recap. For most search funds, I suspect you're looking at <$25k for docs, LLC/SPV formation, compliance, and review. If you have facility with business law, you can keep it under $10k for simple deals by doing most of the root work yourself (file your own incorporation docs, open bank accounts yourself, write LOI's yourself). I recommend doing this and engaging counsel only when you need help with the heavy lift portion - usually begins when you reach the point of term sheet negotiation.

Keep in mind that it's not normal for you to pay legal costs out of pocket - fairly standard to include terms that the company will reimburse the cost of legal fees. That being said, the "company" will be paying fees out of the funding that you put in to complete the acquisition, so it's in your best interest to keep the transaction efficient (though you won't be held personally on the hook for it).

Reply by an investor
from Columbia University in Dallas, TX, USA

Legal costs will be dynamic. In general, more complication and more features drives fees -- e.g., multiple classes of shareholders, complicated capital structure, multiple sources of debt, new employment agreements, stock option or incentive plans, seller's note, earnouts/holdbacks, etc. Another big thing that can greatly increase legal costs -- the lawyer or whoever is handling matters for the seller. An aggressive, irrational, or capricious person across the table dramatically increases legal costs. But you can control for that by a specific and thoughtful LOI. How you conduct due diligence -- and which parts of due diligence you involve lawyers in -- also affects fees. You can get a background report yourself, or a QOE report yourself, etc., routing tashs unnecessarily through the lawyer will drive fees, but many people do it anyway. If there's something in background report or the QOE you want a legal view on, then you can ask after you have it.

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