Is it normal to chip DD consultant & legal fees when a deal goes abortive?
I'm relatively senior at a developer in a high cost of life city. I "grew up" on the development side rather than the transaction side but I've recently move into a lead acquisition role.
Perhaps by luck and due to the path I've taken to get here, I have never had a deal go abortive in my career until now and it's unfortunately a big one. We are in 8 weeks into a 10 week exclusivity to buy a prominent mall in a central city location with some great redevelopment upside - acquisition price of c. $120m. It's a great deal and we've found nothing wrong with it in our DD but frustratingly our LP has just decided to pull out at the last minute.
We've spent nearly $900k on lawyers, structuring, DD consultants, etc - our LP is on the hook for these costs but are asking us to aggressively price chip every one of these consultants given that the deal is going abortive. They've thrown out some ridiculous numbers - they want us to settle at 50% of the actual fees incurred by each consultant. Surely this isn't normal?
I'm about to go have some difficult conversations with consultants who have been working very hard over the past 8 weeks so any input as to what is normally acceptable when a deal goes abortive would be hugely appreciated. Needless to say we aren't getting paid anything ourselves on the deal which makes it even worse!
Depends on why the deal died tbh.
When some of my deals died, the lawyers (very reputable, UK) took a massive haircut from $100k -> $40k but we give them loads of business.
Another set of lawyers always have dead deal discounts for us. (US white shoe)
One consultant refused to give us a discount (so we had to settle upfront) but promised a big discount on the next job.
Hope this is helpful.
Very helpful thank you for sharing - was this in the US or the UK out of interest?
While I'm generally inclined to take a pro-sponsor viewpoint, and understand there are re-trades between buyer/seller for many reasons, I'm not sure what the grounds are for re-trading third party consultants after they've performed their work as engaged. They don't get to share in upside of a successful closing, so why are they sharing the downside of an aborted deal? This is the argument I'd make with the LP, unless this consultants-get-50-cents-on-the-dollar thing is in the LPA, which I doubt.
Thanks for your comment, yes totally agreed in principle - the LP is pitching this as though it's normal but we will definitely be trying that argument
Do what you can in good faith if you have good relationships with these vendors, but I wouldn’t fuck over my vendors just because a LP doesn’t understand that this is big boy business and sometimes deals don’t work, especially if the LP is the one pulling the plug to begin with.
It’s not the architect’s fault that the deal didn’t work out. It’s not the environmental consultant’s fault. It’s not the lawyer’s fault. If they did the work, they deserve to be paid and I’m never a fan of fucking with peoples’ money or businesses. You may win this battle with them, but you’ll not only lose the war with them, but all of their friends that they talk to. I’ve seen it multiple times where a company does something scummy once and the rumors about it spread like wildfire through the industry.
Scumbag move on the LP’s part IMO. They’re asking you to burn relationships that will never come back on them but will definitely come back on you.
Thanks - yes this is exactly what we are worried about! definitely makes us think twice about bidding on anything again with this LP, tough going
Time to weigh the value of your relationship with the LP vs. the consultants you are being asked to screw over. Sounds like a scumbag LP but if you yourself doing more business with them down the line then a pragmatic approach is best.
I’d hate to have to go back to the same consultant/vendor the next time I need something done quickly. There always seems to be some kind of last minute hiccup before DD expiration and/or closing and I need an attorney/surveyor/title company/environmental consultant/etc. to get something done quickly or it’s a major fucking catastrophe. They’re going to remember who stiffed them on their bill the next time you request a borderline unreasonable turnaround time.
This is a relationship question - is this your biggest LP or a one-off partner? Are these consultants critical contacts that you use all the time or are the relationships less strong?
Generally speaking, your consultants are not performing contingent services, they're paid hourly or a pre-determined rate for services which they have delivered. You owe them money. The situation you're in and the associated costs are what are referred to as "dead deal costs" or "pursuit costs" and they're part of the cost of doing business. Does it suck? Sure. But it happens.
I would not fuck over critical consultants for an LP that was not extremely valuable to our company, but if it was a top 3 investor then yes I'd probably be going to the consultants to have some tough conversations, blame it on the LP as they're on the hook for costs, and promise to make it up to them on future business.
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