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How to deal with legacy issues when selling your business

This article is part of
Guide to selling your business

How to deal with legacy issues when selling your business

One of the biggest considerations during the sale of a business is who will be on the hook for the historical advice that was given by the selling firm.

So how should firms deal with legacy issues for old advice when selling their business?

Abhijit Rawal, head of strategy for wealth management at KPMG says: “The conduct risk profile of an advice business is a key consideration for any buyer.

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“As liability for advice exists in perpetuity, buyers of advice businesses need to continue doing the diligence on key topics such as quality of advice provided with respect to suitability, which has been an enduring regulatory agenda.

“Apart from the finances and accounts, the key focus areas for due diligence in an advice business should be its organic growth profile, concentration of fees from certain clients, the ability to extract cost synergies and the risk profile of the business.”

It is important to understand which type of transaction is best for the seller and buyer.

A share acquisition is where the buyer acquires the company that provided the regulated advice, and along with it, the buyer inherits that liability as a result of taking the company with liabilities for past advice.

If structured as an asset acquisition, the seller keeps the company that provided the regulated advice and the buyer can cherrypick the asset they want.

The liability stays with the seller who would then look to put in place adequate run-off insurance.

According to Giles Dunning, partner and merger and acquisition specialist at Stephens Scown, a lot of sales are increasingly structured as share sales owing to the tax advantages for the seller, who would qualify for entrepreneur’s relief, whereas an asset sale is better for a buyer.

Mr Dunning says: “If a seller is not willing to do a deal because it will cause them far more in tax as a result of an asset sale then a buyer might accommodate the seller by structuring it as a share sale.

“But the quid pro quo is that the buyer will want a lot of contractual protection against any issues they might inherit as a result of that.”


The buyer might still take on the liability, but a buyer might want warranties and particularly, indemnities protecting them against any professional indemnity (PI) claim they may suffer as a result of taking on liabilities for past advice, which would mean in that case, that liability could come back to the seller as a result of the buyer making a claim against them.

“Generally speaking, no buyer is going to blindly take on a lot of liabilities, unless the seller has an extremely strong bargaining position,” Mr Dunning added.

As concerns around defined benefit (DB) transfers grow, Alex Canham, partner at Herrington Carmichael says that buyers are more cautious and are being even more thorough during the due diligence process; looking through reams of DB case files rather than just taking a sample of files.