Shaking The Due Diligence Tree

There is no doubt that preparing your business for sale needs careful planning if you are to achieve the end results you want – for the business, its owners, staff and clients.  Greg Hall is a partner and national head of transaction services at Mazars LLP. Here he highlights the need to be prepared, get organised and be ready for all that is to come in these situations, in order to achieve a successful outcome.
When you are in the process of selling a financial planning business, your potential buyer will undertake a due diligence process to enable them to:

  • Ensure they fully understand your business;
  • Ensure that they uncover any deal breakers; and,
  • Ensure there are no surprises.

In summary, they will be taking all the necessary steps to ensure that they are buying the business they have made an offer to buy.
However there are lots of different things that you can do in order to get ready for the due diligence process and that is the purpose of this article.
Where and when
However, before we start on this, let’s take a look at where the due diligence process sits in the sales cycle.  Due diligence will come after you have an agreed headline deal, when the heads of terms have been negotiated and your buyer has probably been given a period of exclusivity, as shown in diagram 1.
Diagram 1

Do your own due diligence
However, before we discuss the nature of the due diligence that will be undertaken on you and your business, it’s important for you to remember to undertake due diligence on your potential buyer.  A few questions for you to consider will include:

  • Can the potential buyer deliver to my ideal timetable for completion of the sale?
  • Does the potential buyer have the funds, or access to the funds, to pay me for my business?

To enable you to prepare for successful due diligence, you need to be aware of the areas that the buyer is likely to cover.  I refer to these as the ‘due diligence suite’ as set out in diagram 2:
Diagram 2

The depth and extent of due diligence carried out will depend on the risk appetite and transaction structure. This will be undertaken by the buyer themselves and/or through using external advisers.
Your due diligence process will include meetings/conference calls, information requests, Q&As and information (and lots of it) which you will need to organise. The use of an online dataroom to collate all the disclosure information may well be part of the completion mechanism of your sale.
What you need to consider
To help you to be prepared, get organised and be ready to go through your due diligence process, below are a few areas and pointers for you to consider:

  • Take advice and make sure you engage with advisers (lawyers, accountants, corporate financiers) who are specifically experienced in buying/selling businesses within the IFA sector
  • If you have any particular issues in your business, sort them out first. Being able to be upfront with the buyer about such issues – and how you are / have resolved them – will help to take away deal breakers / value eroders. The earlier these are discussed the better
  • Start pulling together all your information that will be needed for due diligence before it is asked for. Ask your advisers what you will need – and make sure that it is well presented, does not contain inconsistencies or errors and is complete
  • Think about your commercial information. By this I am referring to client segmentation, income by adviser, new versus recurring business, and your funds under management versus assets under influence
  • Within your financials, pull out exceptional income and costs so that you can present a well-rehearsed profit and revenue stream
  • What is your client proposition? Ensure that this is clear, coherent and well documented

Why are these things this important? 
The fact is that any issues, or perceived issues, within your business that are uncovered during the process could become deal breakers (the buyer withdraws from the transaction) or lead to renegotiation (the buyer changes the deal – and of course the price is unlikely to be going up!).
Common deal breakers
To help with this, here are just a few of the common deal breakers that we repeatedly see happening in transactions:

  • Clouding business with your private affairs – this often leads to tax problems
  • The business offered for sale is not the same as the buyer thought it was (for example client losses, regulation deficiencies and hidden liabilities)
  • Tax schemes, aggressive tax avoidance and poor tax compliance

It is important to remember that in every interaction you have with the buyer and their advisers, they will be undertaking due diligence on you and your business.  This will span the full timeline from initial approach right through to completion of the sale.  Therefore, whilst you should be open and transparent with the information provided, you need to ensure consistency of your message.
Get it right first time
This is likely to be the first and last time that you sell your business so you need to ensure that you really do make the most of it.  It will be time consuming (especially as you still have a business to run) but my recommendation to you is quite simple. To have the best chance of achieving a successful sale of your business, you will need to ensure there is a smooth due diligence process which is all brought about by being prepared, getting organised and being ready now.
Greg originally presented this information at Gunner & Co’s Seminar ‘Building Value in your Financial Planning Business’ in May 2017.  Join a Gunner & Co. seminar, which covers due diligence preparations, accessing entrepreneurs relief, current business valuations and much more: Events 
About Greg Hall
Greg specialises in transaction services, operating in various sectors and has undertaken due diligence on deals involving IFAs.  Along with his team at Mazars, he undertakes a wide range of corporate, PE and bank-led due diligence assignments in addition to the role of Reporting Accountant for IPOs.
Greg is a chartered accountant and is also the firm’s ethics partner, with responsibility for the adequacy of  Mazars LLP’s policies and procedures relating to integrity, objectivity and independence, as well as compliance with the FRC’s ethical standard.