Beware of commissioned advisors

The problem of buying advice is you don’t know if you have received value for money until after you have used the advice and, even then, it may take some years before the results can be ascertained for you to make a judgment.

When the advisor is remunerated by a commission on the transaction rather than the quality of the outcome, there is an inherent conflict of interest. This situation is especially problematic in an acquisition situation where the advisors are paid on the value of the transaction rather than the acquisition objectives achieved.

I have seen numerous situations where entrepreneurs were encouraged to enter into acquisitions where the advisors were pushing the deal but the acquirer really did not have the capability or capacity to enter into the transaction.

Perhaps we shouldn’t really expect any other relationship, after all, the advisors are there to sell their services and they don’t get paid unless a deal occurs. If we are willing to enter into such arrangements, we are naive to expect any other result. That is not to say that all advisors act this way, but how do you tell the good from the bad?

What we have in this relationship between advisor and client is a conflict of interest in the way in which outcomes are used to reward the parties. If I as an advisor get paid regardless of the quality of the outcome, I may not put as much effort into ensuring the right transaction is undertaken, especially if I end up putting lot of effort into rejecting the wrong ones.

The better advisors want to be part of the journey for a long period of time and earn fees over multiple transactions so they have an interest in ensuring you come back to them because of the quality of the prior outcomes but not all advisors have a long-term view of a relationship.

What this means is that you have to be very careful with whom you engage. You need to treat your advisor like any other critical supplier and do your homework. Undertake due diligence on them in the same way that you would investigate a potential acquisition. You can learn a lot by seeing how they work and what processes they use to identify possible acquisition candidates for you. If they suggest spending time working with you on the strategy and acquisition criteria and they bring their experience into that discussion, that should help with the assessment. Talk to their other clients and ask about the outcomes of prior acquisitions several years after the deals were done.

What you want in an advisor is a partner who will go the distance with you. Rather than force them into a take or leave it commission arrangement, discuss a fee for service arrangement where they help you with strategy and process before entering into a transaction. See if they will take part of their remuneration in deferred commission based on acquisition outcomes being reached. Their rewards need to be aligned with your own objectives otherwise it is a partnership which has a high potential to steer you in the wrong direction.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.