Key Stages of Privatisation

2. Pre-sale Considerations

b) External advisors

To oversee the sale of the enterprise, from the initial valuation of its worth through to the eventual management of the sale, it is sensible for the vendor to appoint an external advisor, who is nevertheless independent of both the vendor and the potential bidders, and as such will have no conflicts of interest with regard to the enterprise being sold. Most frequently governments have appointed an investment bank to act as advisor and organizer of the sale, but in some cases they have chosen an accountancy firm for this purpose.

As well as the role of a main external advisor, it is also likely that the vendor will seek other specialist advice during the course of the privatisation. External advisors might include financial advisors, legal advisors, bankers, accountants, public relations advisors, printers and marketing specialists.

Consulting a range of high-quality specialists is likely to be of great benefit to the vendor, and if possible, the best results may be obtained from consulting more than one advisor on each issue, as this allows for a comparison of opinions in matters which may involve an element of subjective judgement.

The best way of appointing external advisors is through a competitive process, in which prospective advisors will propose what they have to offer to the vendor as well as the price for their services, as this process will hopefully guard against favouritism or accusations of it from any quarter. In assessing the quality of advice on offer, vendors will want to examine the track record of prospective advisors, including their knowledge of the sale processes concerned and whether they have developed appropriate sale techniques with positive benefits for the vendors.

Specialist consultation, while extremely beneficial and with regard to some matters effectively essential to the vendor, can also be expensive. In order to try and minimize consultancy costs, vendors should consider carefully themselves, and specify clearly to contractors what external advice is needed, including that specification in their contracts.

Naturally, the vendor is likely to have drawn up a timetable and sale strategy with careful planning, especially in the cases of larger and more complex privatisations. However, there can be unforeseen difficulties, which may create more work for contracted external advisors than originally anticipated, and in turn higher costs for the vendor.

Hence the vendor should set appropriate contract budgets based on careful planning and try to limit the extra costs of any unforeseen events. At the end of the sale the vendor should review the eventual outcome with regard to how closely it stuck to the original budget. Any changes to budgets due to unforeseen events need to be negotiated properly, and the vendor should ensure that any special features, such as success fees paid to lead financial advisors, represent value for money. A budget should be calculated with sensible, realistic reference to the work plan, and payments to contractors should be in accordance with the contractual undertakings and at rates approved at appointment.

Vendors may prefer to negotiate fees for particular tasks with the contractors before beginning them, rather than paying contractors for their services at an hourly or daily rate, as this will encourage the contractors to work efficiently and remove opportunities for them to overcharge for their services. Sometimes contracts with, for example, lead financial advisors make provision for the payment of success fees on completion of the sale. Particular care should be taken when the success fee is based on the amount by which the privatisation proceeds exceed a benchmark value, especially if that benchmark value was set by the lead financial advisors themselves.

Advisors should apply due diligence to all the work they undertake, and advise the vendor accordingly. Due diligence is the process of identifying all the risks and implications of any decision to be made.

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