We were at a MBO conference earlier in the week and a client asked about how lawyers charge for their work. I said that solicitors as business advisors ‘sell their time’ so fees are largely determined by the number of hours spent on a transaction, and valuing higher level expertise more since that will add more value and efficiency.
Solicitors are known to charge by the hour (in which case details of the work done should always be provided), but more often in commercial work, solicitors will usually agree different ways to charge, which should reflect the underlying business risk of the transaction. I said that some common methods that we have used are:
Fixed fee – We work with the client to determine the exact scope of work, so that based on our experience of similar transactions, we estimate the exact work likely to be required by us. We then agree a fixed amount for the legal fees. This means that the client will have certainty in the budget for the transaction. Of course we will have to make certain assumptions in relation to the transaction, for example, completion by a certain date, or the structure or the parties not changing – if any assumption is no longer valid, the fee will have to be discussed again.
Success fee – We would agree either a fixed fee or hourly rate, and then discount either by an agreed percentage in return for an uplift should the transaction proceed to completion. This may be suitable in situations such as a competitive tender where the reward if successful is high, but there is also a high risk of failure at least in the initial stages.
Abort fee – We would agree either a fixed fee or hourly rate, and then discount either by an agreed percentage should the transaction fail to proceed to completion. This may be suitable in very large transactions with associated higher fees where there is a particularly large financial consequence if the transaction does not complete. We would in such circumstances expect to ‘share the pain’ with the client.
There are of course many other fee arrangements. We are always happy to discuss, and hope to agree fee arrangements with you in a transparent and certain manner.