Ms Lord chose her buyer as she liked the culture match with her own firm, and believed that would help safeguard client relationships after the transaction was completed: “I happen to think consolidators just buying firms for funds under management achieves nothing, because unless you’re going to look after those clients like you had before then they will all walk away.”
Alistair Creevy, who in 2018 sold his business Independent Advisers (Scotland) to Succession Wealth, also sees the value of spring-cleaning a client book to uncover potential legacy issues.
He had around 800 clients engaged with him and, fortunately, most of these were on a platform, therefore minimising legacy risk.
“A consolidator is not looking for you to sell them a business that isn’t viable,” says Mr Creevy.
“They will see through that. So they ask about PI cover and how many complaints you’ve had, and so on.
“If you’re trying to do it on the cheap and get rid of your liabilities, consolidators are not interested.”
This is the same advice provided by IWP chief operating officer Tony Spain, who says there is no point in hiding anything from due diligence.
He says: “[Problems] will inevitably come out in the due diligence, and most issues are manageable once understood properly.
“The most common one at present is historic DB transfer exposure. Depending on the number of cases that the seller has done in the past this may mean that the acquisition needs to proceed as an asset purchase, with clear communication to clients on the change, and a Principle 11 FCA notification to ensure that the regulator is aware of the plan.”
PI pains
Consolidators will always seek to indemnify themselves from potential liabilities and Giles Dunning, a partner at Stephens Scowns LLP who has worked on many advice firm transactions, says PI cover is becoming a bigger sticking point for deals.
“There’s usually quite a lot of negotiation around the seller’s liability for those issues going forward,” says Mr Dunning.
“Insurers are much less willing to give long-term runoff cover when a business ceases trading. What we have seen is insurance is getting more expensive and some insurers will not cover some areas.”
In fact, Mr Dunning says this can ultimately reduce the transaction price of a firm: “One thing that often comes up is: who is going to fund the ongoing run-off cover for the company being bought? That is quite expensive and can effectively reduce the price, it can be a transaction cost, basically.”
“Very commonly sellers will be expected to give an indemnity for past advice, so if there are any claims or losses arising they will be for the seller’s account,” adds Mr Spain.
