The world of mergers & acquisitions (M&A) is as complex as it is varied, where everyone has a story of how best to approach the maze, what to expect and what might go wrong.
At Gunner & Co., we strongly believe the more business owners understand about the journey of selling their business, the better equipped and ultimately better value you will receive.
Through our years of working with business sellers, it is clear there are some well-routed myths which are worth being discussed.
M&A Myth Number 1: Selling the shares of my company will leave me with no liabilities
Many advisers go into a sale purchase convinced that a share sale is their ticket to leaving behind the long tail of potential complaints from clients they have advised, and that these are simply handed over to the buyer.
Whilst it is correct that a share purchase is a ‘warts and all’ sale, to manage their risk, the buyer will then ask the seller to agree to warranties and indemnities to cover any future claims made by your ex-clients. Now those warranties may be time-bound – limiting your association, but they may not.
The breadth of the warranties and indemnities you are asked to give will generally be established through the due-diligence process – how confident a buyer is in your advice process, after they have ‘looked under the bonnet’ so to speak. This adds time and complexity to your sale journey, and depending on the findings, can negatively affect the purchase price.
It is worth bearing in mind here that the ‘looking under the bonnet’ will primarily take the form of data and information analysis. It is not unusual for a seller to have many detailed reasons why advice decisions have been made, however if this isn’t explicit in a file it will be perceived as a potential risk to the buyer.
Warranties and indemnities don’t only cover advice liability, and may go on to cover claims from former-employees, disputes/litigation from suppliers, claims on intellectual property rights etc.
To put this into perspective, a company with 38 defined-benefit transfer cases will have significant specific indemnites in any sale agreement. They could be open ended, and will typically take the form of the volume of cases multiplied by the insurance excess – which at times could exceed the sale value.
Gunner & Co,’s webinar ‘ Understanding and Resolving Risk before Sale’ will talk you through managing your data and identifying remedial action you can take to minimise the perceived risks in your business.
M&A Myth Number 2: Due Diligence is a huge and daunting task
Now don’t get me wrong, if you’re entering into a share sale, and your firm is more complex than a single-adviser firm – due diligence will be detailed and time consuming.
However, any work you have done in advance to de-risk your regulatory liability position (as mentioned above), will contribute to making your due diligence process easier to manage.
Ultimately there are two phases of due diligence – data and information collection by you and evaluation and risk-assessment by the buyer. The more you can be doing on weekly, monthly and annual basis to have your data well-managed, accessible and accurate, the easier it will be to collate it for due diligence.
And to reiterate, risk-assessment will be formed from what is in your files, not in your head. At the end of the day, that’s how the obmudsman would approach any investigation.
As a starting point, it is your job as a seller to clearly articulate: Who your clients are and how they may be segmented (in terms of client proposition and fee structures), what your investment proposition and platform strategy is, and how your client and management information is organised and stored.
When approaching information collection:
- Check what is being requested, and if in doubt seek clarification
- Provide only what is requested
- Check the information twice before it is sent, to ensure accuracy
- DO NOT ‘change’ or ‘doctor’ anything
- Obtain confirmation of receipt and that there are no queries.
If you enter into an asset purchase scenario with a buyer, due diligence may not be too dissimilar from an annual compliance review – typically centred around file-checking a portion of your clients, getting an understanding of your back-office processes and systems, and understanding your accounts and income streams.
As with every aspect of selling your business, the more you understand in advance, the more you can prepare for all eventualities, leading to a stress-free process. If you would like a copy of Gunner & Co.’s Due Diligence check list drop me a line (louise.jeffreys@gunnerandco.com)
M&A Myth # 3: It’s a sellers-market – I’ll sell my business easily
It’s fair to say, as a broker with a very broad range of relationships across the buying market, the market is more active than ever. However in a recent Gunner & Co. survey (full report to be released next month) 22% of respondents suggested they are planning to sell in the next 12 months. With around 4,500 individual firms in the UK, that suggest almost 1000 firms coming to market. Even if only 1/3 of that number is a more likely volume, that is still more sellers than buyers.
So it’s best to assume it will not be simple to sell your business, and even less so if you want to sell completely on your terms. The best transactions take place where the buyers and sellers motivations align – and that’s our job as a broker – to literally ‘match-make’ the connection. But if your criteria to sell is long and potentially unrealistic, you may find you either don’t sell or spend an awful long time looking for exactly the ‘right’ buyer. And having only one buyer which is deemed ‘right’ puts you in a difficult negotiating position.
Every buyer has key criteria of the type of business they want to sell, typically:
- Geographic location of clients
- Average portfolio size of clients
- Number of clients
- Ongoing advice fee
- Financial planning and investment approach
So whilst there may be plenty of buyers out there, that doesn’t automatically mean they all want to buy your firm.
Being realistic in what you are willing to accept from a buyer – price, payment terms, warranties etc. and genuinely seeking a win-win position for you and the buyer, is the only way to start this journey.
We’re currently offering free market overview consultations to anyone thinking of selling in the next 5 years. If you would like to book that in with me or my colleagues register here.
M&A Myth # 4: All that matters is the right deal
Focussing too heavily on the details of the contract and the ‘deal’ can have its detriments, if all of that focus is at the expense of what actually happens after it’s been signed.
All too often sellers focus too much on the wedding ceremony, forgetting what’s really important is the marriage itself.
Consistently staying true to your initial aspirations – whilst being realistic – and putting what happens after the deal at the forefront of discussion, are all ingredients of a more successful partnership.
Understanding what happens during transition, how and who will contact clients, how much involvement you will continue to have and for how long, and managing the expectations (and the hearts and minds) of any of your team staying with the buyer, is just as important as the details of the contract.
M&A Myth #5 – You won’t get your final payment
I’ve heard many a (somewhat cynical) business owner state that the chances of getting the final payment due from a deferred consideration are typically low. Now of course, I cannot speak for every buyer out there, but the buyers we at Gunner & Co. work with, who are thoroughly vetted, take successful acquisitions very seriously.
Many big buyers employ specialists to manage the process, from client novation specialists to due diligence experts – this is serious investment. Furthermore, the time spent on acquisitions is considerable – there’s no such thing as a simple deal, and doing it properly takes time and focus. Focus away from business as usual.
Furthermore there is a chance they will be choosing between a number of potential purchases. So getting the most out of the one they choose is essential.
With so much investment and time it makes little sense not to make the very best of every opportunity. Buyers don’t (from my experience), go into a purchase thinking ‘not to worry – if it doesn’t work out we’ll just reduce the final payment’. Serious buyer – so those working with professional brokers like Gunner & Co. focus heavily on client integration, and fundamentally return on investment – ie growing that they’ve bought – not looking on as it shrinks.
The caveat of course, is to work with a reputable buyer, which more often than not involves working with a reputable broker.
We’re currently offering free market overview consultations to anyone thinking of selling in the next 5 years. If you would like to book that in with me or my colleagues register here.