Once the deal has been agreed between yourself and your buyer, the transaction will progress to the due diligence stage.

Due diligence will be carried out by the buyer on your business. However, due diligence works both ways. When you sell your business, you should conduct your own due diligence on the buyer, especially where the consideration will be paid on a deferred basis.

What should a seller's due diligence process include?

A good starting point is to request testimonials from other vendors when they were acquired by the same firm. Most buyers will understand this is an important safeguard and should be happy to support the request.

Some IFA buyers are referred to as ‘consolidators’, who look to maximise the value of their acquisitions over a short term, with little emphasis on longevity. Where acquirers focus on quantity as opposed to quality and ‘fit’ of the target, there’s far more risk and exposure undertaken by the seller. Emphasis on the buyer’s complaint and PI history should be factored into your seller’s due diligence.

You should consider the financial stability of the buyer. This is particularly crucial where the deal consideration is paid on a deferred basis, or includes shares in the buyer firm. You should ask about the buyer’s growth plans and whether they are taking on secured debt to fund them. You are likely to feel more confident with a self-funded acquirer, as opposed to one with a complex or geared capital structure.

You should also examine the buyer’s culture and values to ensure they are compatible with your own. This is important if you plan to remain as an adviser; equally, if you are retiring you will want to ensure the buyer is a good fit for your clients. There should be ample face-to-face meetings accommodated at the introductory stage so that you have full knowledge of the buyer and their philosophy.

You should also consider a buyer’s acquisition strategy. Do they target both the mass affluent and high-net-worth markets? Ideally, you would seek a purchaser who can accommodate all acquired clients, irrespective of the size of their investments, and not insist on an arbitrary cut-off point based upon portfolio size.

It’s crucial that you are aware if the purchaser is provider-owned and reliant on the migration of assets, as this will shape the integration of you and your clients and could impact on your deferred consideration.

You should determine whether the deferred consideration is based upon remuneration or whether there is any financial incentive for you to migrate assets. It’s not Treating Customers Fairly (TCF) to incentivise the transfer of client assets to the detriment of the client. Even if migration of assets is not insisted upon, the seller should be advised as to exactly how and when clients will be transitioned onto an appropriate service proposition. This is to ensure that both parties are RDR compliant and are treating their customers fairly.

Second capital event or practice buy-out policy

It’s important to consider the adviser model adopted by the acquirer after completion. Is this an employed or self-employed structure? If you are to be employed, would you have considered working for the acquirer if you weren’t selling to them?

It’s likely that a practice buy-out will only be offered to a self-employed adviser. A practice buy-out (PBO) allows you to continue to create a capital value in your client base and for this reason, is often referred to as a second capital event. Therefore, it’s very important to consider exactly what opportunity is offered by the acquirer.

You would expect the acquirer’s PBO policy to include:

  • an indication as to the valuation of the client base in terms of an indicative multiple
  • process of the PBO and contracts
  • any eligibility criteria stipulated by the acquirer
  • a payment profile

Many selling advisers who join a new firm no longer have the regulatory burden of running an authorised business and relish the opportunity of having more time to advise and build their client bank. A realisable PBO, therefore, should not be overlooked.

What will a buyer's due diligence process include?

Acquisition due diligence will be carried out by the buyer on all target firms, whether they operate as a limited company, LLP or sole trader. It should give the buyer sufficient understanding of the legal, regulatory, financial, tax and operational aspects of your business to make an informed decision to proceed with the purchase. It will require a vast amount of documentation from you, the seller, so it’s best to be prepared early.

The buyer’s team, or their legal and tax advisers should co-ordinate due diligence and conduct a detailed analysis.

The length of the due diligence process will depend upon the structure of the deal. Due diligence for a share purchase will be more in-depth than an asset purchase, because of the extra liability involved. As an estimate, the process may take one month for asset deals and two months for share sales, depending upon how quickly you can gather the information.

Where buyers have other partners, such as banks or private equity firms, they will have their own strict due diligence requirements, which will mean the process takes even longer.

The buyer will provide a due diligence questionnaire and usually set up a Dropbox or DataSite facility. This will let you provide and collate documentation for the buyer’s team to review. The information you can expect to provide will include:

  • corporate structure details and set-up
  • accounts
  • compliance systems and controls
  • complaint history
  • client demography
  • details of service propositions and charging structures
  • IT and back office system

The buyer’s team will examine the questionnaire and supporting documentation.

Have you obtained FCA approval for a change in control?

Individuals or companies intending to acquire or increase control of an FCA-regulated firm must obtain prior approval from the FCA. This is known as a change in control application under the Financial Services and Markets Act 2000 (FSMA). This is required where you are selling the shares of your directly authorised business. It’s a criminal offence under FSMA Section 191F to acquire or increase control without notifying the FCA first.

Notifications for a change in control are known as Section 178 notices; this is usually made as a joint application by the buyer and seller. Quite often, the acquiring firm will complete the application and send it to you for signature, once the deal terms are agreed. The change in control process usually runs alongside the due diligence.

Along with the notification forms, the FCA will require various supporting documents, including:

  • post-transaction structure charts of the target and the acquirer
  • CVs for individual controllers and directors/members of corporate controllers of the acquiring firm
  • accounts for corporate controllers
  • proof of funding for the purchase
  • any negative disclosures for the controllers and supporting information
  • other documents as requested

The FCA can take up to 60 working days to process a change of control case – this is an important consideration when scheduling a deal.

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