What Does Due Diligence Cover?

Due diligence typically falls into five categories:

  • Human Resources

  • Finance

  • Contracts

  • Governance

  • File Reviews

The depth of the process depends on the type of sale:

  • Share purchase – The buyer acquires the company, including all assets and liabilities.

  • Asset purchase – The buyer purchases selected assets, often just the client book.

Here is a flavour of what each section will entail:

Human Resources

Buyers want clarity on your employment practices and people-related risks. Key considerations include:

  • Are contracts of employment in place for all staff?

  • Does the firm have Job descriptions in place for each member of staff?

  • Is there a staff handbook?

  • Does the firm use third-party HR support (e.g. Peninsula)?

  • What insurance cover is in place (e.g. employer’s liability, Keyman, office insurance)?

Finance

  • Copies of the last 2 years Reg Data returns minimum will be requested

  • Copies of the last 3 years financial year end accounts

  • Are bonuses issued? If so when and to whom? What metrics are used to calculate?

  • If there are self employed advisers, what is the income split?

  • Total Assets Under Management (AUM)

  • Clawback data

  • Is there a wind down plan in place?

  • Does the firm know how much capital adequacy it needs to hold in total including any additional funds to cover PI increased excess and/or exclusions?

Contracts

  • What third parties does the firm work with?

  • What contracts in place?

  • What are the notice periods?

  • What due diligence has been undertaken and where is the evidence of this?

  • PI schedule including endorsements

Governance

  • Has the firm had any interaction with the FCA i.e. involved in thematic reviews? What were the results of these?

  • Review of the firm’s FCA register – are the permissions correct for the business that the firm writes?

  • Is the Directory of Financial Services Workers correct? Do they reflect the qualifications of the advisers and SPS?

  • Are SPS certificates held for all competent advisers?

  • Are Board/team meetings held and properly minuted? These help to show the firm’s culture and the ‘tone from the top’.

  • What MI does the firm review?

    • Annual review meetings – big focus.

    • Complaints data

  • Are there Statements of Responsibility in place which are correct?

  • There will be a review of Compliance Manual

    • AML procedures

    • records of Training and Competence Scheme
    • Investment strategy and PROD

    • Consumer Duty annual reports

    • Fair Value Assessments

    • Data security policies and staff training

    • Vulnerable client policy, training, and MI

    • Advice process documentation

    • Annual review meeting process

    • Disengagement process

File reviews

This is a key part of due diligence process, especially for share purchases.

First impressions count. How the client files are presented to a third party really makes a difference regardless of whether they are paper files or electronic.

This means making sure that the client file is robust ensuring that for each piece of advice there is evidence of:

  • KYC: Fact finds, meeting notes, and cashflow forecasts

  • Attitude to risk questionnaires/ meeting notes

  • Evidence of capacity for loss considerations

  • Research – including any ceding details for replacement business, performance research

  • Illustrations

  • Disclosure documentation, including privacy notices and fee agreements

  • Suitability reports

  • Application forms

It is likely that any third party conducting due diligence will use the FCA’s suggested file review spreadsheets for DB transfer advice (DBAAT), at retirement advice (RIAAT) and investment advice (IAAT). It is recommended that you look at these forms and perhaps conduct some inhouse checks using these forms so there are no surprises to you.

Additional preparation for due diligence:

  • Re-issue Privacy notices with the statement confirming who will have access to data in the event the firm wants to sell

  • Ensure client data is accurate and cleanse your CRM

  • Have a list of suppliers and out sourced partners used

  • Ensure your HR evidence is up to date

  • Ensure the firm’s T&C records up to date for all advisers

  • Make sure the Complaints Register is up to date

  • Make sure there is evidence that Client Annual Review Meetings are taking place

  • Take a look at the guidance from the FCA to firms which are looking to sell.

Summary

This looks like a lot of hard work and it is. The above is a flavour of what will be covered and asked for. However, if you do the preparation, the first impression you will give to any potential buyer is that you are organised and run a well managed and compliant firm. This means you can be confident in obtaining a fair price for the firm that you have worked so very hard for.