The Illusion of Free Advice
Lawyers charge for giving legal advice. Tax experts charge for giving professional tax advice. Doctors charge for giving medical advice. Many corporate finance professionals, tend to work on a “success basis”, seemingly giving free advice. Or not.
In the corporate finance and investment banking world, there is no such thing as free advice. There is advice that you get before you pay, and there is advice that you get after you pay. Many companies looking for funding prefer the former, without considering that the price to pay will be significantly higher in the former scenario than in the latter.
Let’s consider an example. Company A (“CO”) identifies a business opportunity and needs to raise $5 million additional capital for their business in order to pursue this opportunity. Like all opportunities, this one has a shelf life and CO has three months to raise the capital, or lose the deal. The opportunity cost is $15 million in potential profits.
Having exhausted their primary banking and financing contacts, the management of CO then decide to approach Investment Bank A (“IBa”) for advice on raising new capital for their business. IBa charges $20,000 advisory and 3% success fees for advising CO on their capital raising efforts, and provides a clear engagement letter which mentions the timeline and scope of work that will be provided for the advisory fees. CO, at the same time contacts Investment Bank B (“IBb”) and Investment Bank C (“IBc”) to ask for the same assistance in capital raising. IBb and IBc agree to work for free, and be paid only if they successfully raise the $5 million for CO. IBb asks for 5% success fee and IBc asks for 3% success fees with 5% equity stake.
Question: Which route would you go for if you were CO?
There is certainly a need for a reality check for everyone looking to raise capital for their business or projects.
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I was recently appointed as the President of the Singapore Business Council (UAE). The vision of the Singapore Business Council (UAE) is to be the focal point for Singaporean entities and individuals seeking opportunities with other entities in the Gulf, and also to assist in positioning Singapore as a base for foreign businesses to expand into, in partnership with Singaporean entities and individuals.
