How to avoid issues with client novation

This article is part of
Guide to buying and selling a firm in 2017

How to avoid issues with client novation

The communication of client contract novation is an art rather than a science.

This is the view of Matthew Meadows, corporate finance partner with Kingston Smith, who says this is an exceptionally important element of the buying and selling process, but one which is exceptionally difficult to achieve.

He says: "It will depend on the nature of the relationship with the clients and volume of contacts involved. 

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"Typically, communication should only happen when a deal is nearing its final stages and completion is virtually certain to avoid embarrassing and potentially damaging retractions."

Mr Meadows adds: "All communication should be carefully planned and jointly agreed by both sides and would ideally include input from experienced PR professionals."

For Lawrence Cook, director of marketing and business development at Thesis Asset Management, continuity is the core element involved when it comes to novating clients.

He says: “Clients will be concerned about continuity. Any corporate change can impact client confidence so early communication about service and availability is important."

This is why during the novation process, many sellers will remain with the purchasing firm for a couple of years, or at least be employed in a part-time consultancy role to ensure a smooth handover of clients.

Mr Cook adds: "Many successful purchases involve the outgoing advisers doing a client handover for a couple of years. After all, a buyer of an IFA isn’t buying fixed assets, they are buying goodwill and ensuring that doesn’t go out the door is critical.”

John Joe McGinley, founder of Glassagh Consulting, agrees. "Most advisers build their businesses organically, one prospective client at a time, through networking and establishing personal relationships that lead to referrals.

"The clever buyer will retain the seller for a set period to handle the changeover. This ensures trust is built between clients and the new owners."

Change of control clause

One of the ways to ensure proper continuity for the client is to have in place a change of control clause within the agreement.

Linda Whittle, senior associate for law firm Fladgate, says taking over the contracts of a target business is in principle automatic where a company’s shares (as opposed to its business) are acquired.

However, many commercial contracts contain “change of control” clauses, which mean the counterparty or client is required to agree to continue the business arrangement when the company is under new ownership.

She comments: “In some cases the full novation of the contract with the client will be required so a new agreement is made between the trading entity and the client.

“In acquisitions of assets and businesses, each contract will need to be specifically assigned across to the buyer or new trading entity and this also may require permission to be effective.”