How to deal with legacy issues when selling your business

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.

“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.”

Indemnification

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.

Mr Canham adds: "Buyers are saying they do not just want to rely on the indemnity and warranties. [They] want to identify the problems now.

“Where you have a business that has done a lot of DB transfers, the buyers are also factoring that into the price.”

On the sellers' side, conduct for claims clauses are now even more important, in a busy complaints environment.

“So you can be alerted if a claim arises and you can step in and try and manage that process," Mr Canham says

“It stops the buyer settling the claim to get rid of it and leaving the seller to underwrite the claims.”

Stuart Dyer, chairman of consultancy firm Soprano Mergers & Acquisitions says a good acquisition arises when the buyer is very clear about their business and operating model and their culture.

This means they can identify acquisitions that will fit with their business model and culture.

Mr Dyer says: “When you get that situation and there is an open dialogue between the businesses, that tends to give rise to solid and successful integration. The greater the clarity right from the outset, the more likely a successful transaction, and you won’t get a dispute at a later stage.”

Mr Rawal says: “Based  on our experience, creating value in acquiring an adviser business is predicated on having the right platform of strategic, commercial and operating capabilities to integrate an advice business, the rigour and discipline of deal execution and post deal integration and robust and comprehensive due diligence that informs the right price and value expectations.

"We often see value being eroded because the buyers of advice businesses haven’t created a profitable operating platform that allows for easy integration and value realisation.”

Mr Dunning’s top tips on how due diligence when selling are that advisers should:

1. Ensure all client engagements are all in good order
2. Clients have been seen in the last 12 months and signed up to current terms
3. Make sure they have the basics right. Where they own a company, they should make sure things like statutory registers are up to date and that they can prove ownership of the shares
4. Make sure they can provide a good audit trail for all your compliance activities
5. Demonstrate good levels of compliance and if there are any issues/complaints make sure they have good documentary evidence of how that was dealt with

He also says that advisers should start the due diligence earlier in the sale process.

And even where there is missing information, Mr Dunning says that advisers need to make sure they have presented the information in the best way possible, taking care to disclose any information within their knowledge.