The habit of ‘saving’ money on specialist services has a fully quantifiable (negative) effect, we have seen this in practice.
It is important to note that being aware of expenditure and trying to limit costs is completely understandable and admirable. This trend is especially reinforced in the case of intangible services, where we do not buy physical goods from a store shelf, but services or knowledge, e.g. legal security of transactions.
A customer buying a service (which cannot be seen, therefore more difficult to appreciate) sometimes manifests a strong desire to question any given component of the cost and the desire to cut the scope of service to a minimum. This is of course the customer’s prerogative and we respect it. However, some services cost as much as they do because they require, for example, a lot of work to be carried out by an experienced specialist. Failure to do such work comes with (negative) consequences. We describe below one of the issues this causes.
Example no. 1 – “Deal of a lifetime”
A client finds a foreign buyer for a very attractive property. Given the rate of return the client can achieve from the investment after only a few years, this should be considered a great deal. A significant investor, several million PLN coming in to the vendor’s bank account, a high rate of return on investment. Congratulations!
Unfortunately, the buyer is in a strong position, an aggressive stance to transfer the risk of the transaction onto the vendor, including of course requesting personal guarantees, cause resistance from the vendor. The very structure of complex property ownership matters requires advanced legal engineering. This is not helped by the attitude of the buyer who does not want to bear transaction costs. The issue here is that the risk lies with a seller who is still pondering whether he/she should actually use the help of advisers! Additionally, there is a further risk – the failure to close the deal as a result of increasing tension between the parties.
It is at this stage that our law firm was asked to bring about a successful conclusion to the negotiations between the parties. The vendor’s attitude wasn’t helpful to the process, they stubbornly insisted on reducing the amount of work carried out by their adviser due to rising costs. We are talking about tens of thousands of PLN in a transaction worth several million. When assessing the potential negative consequences of such approach the following must be taken into account:
- transaction fall through – the buyer loses patience due to the protracted process,
- failure to safeguard the interests of the vendor – even the most aggressive attitude of the counterparty can be overcome – but this entails hiring advisers, i.e. costs(!),
- the long-term effects of failed transactions (market changes – the current pandemic and the potential risk of a possible crash – caused many transactions to fall through) and the ensuing negative consequences for the vendor.
To close off, a rhetorical question. Is it really worth taking such significant risks or even risking the success of a transaction worth several millions of PLN only to save tens of thousands of PLN?
Example 2 – I will save a few thousand to pay several hundred thousand
A promising start-up, looking for finance (who isn’t?!). At the start of its journey it allowed any investor in, which is quite understandable, after all, any capital is welcome and in the short term, this is acceptable and defensible. Except that the lack of adequate legal securities has far-reaching consequences for the future – let’s look at it from a long-term perspective.
- the counterparty was an institutional investor,
- the start-up had no advisers (because of the added cost),
- the structure was diluted – investors big and small – because, well… the start-up needed capital.
The outcome was that the statutes of the start-up included a number of provisions stopping the owners from properly running the business and caused them to lose control over the company. When a strategic investor appeared on the horizon, it was necessary to provide the founders with the appropriate tools to wrestle back control over the business and to ensure the remaining shareholders’ cooperation or potential exit, should that be a condition set by the strategic investor.
This was eventually achieved but at a great cost. The founding shareholders had no choice but to agree a high exit price for the benefit of the minority shareholders. The cost of not agreeing the legal framework at the time of investor entry was immense.
The conclusion? If you do not invest at the outset, you will pay exponentially more on exit.
It didn’t have to be that way. For a start-up to set entry conditions for investors isn’t always a deal breaker; quite the opposite in fact. A clear set of conditions, a well thought through legal framework can only strengthen the positive image of the start-up in the eyes of the investor. Given they have engaged in talks and are looking to invest, it can only mean they approve of it. Use this to your advantage! However, please remember, it will cost you money because it requires input from specialists who will be able to help your start-up.