Acquiring an advisory business: Your due diligence checklist

5 July 2021
↑ Top

Acquiring an advisory business: Your due diligence checklist

5 July 2021

Nick Eatock
Nick Eatock
Chief Executive Officer

Your due diligence checklist

Having completed your planning and reached the stage that “Heads of Agreement” have been signed (i.e. you have agreed a price for the firm that you want to purchase and the basis on which the acquisition will be made), you now need to undertake more detailed Due Diligence (“DD”) before committing to signing the Sale and Purchase Agreement. (“SPA”.)

What questions should you be asking and what are you seeking to find out?

There are any number of DD questionnaires in use, and your professional advisers will each have their own versions, but you should nevertheless be satisfied that what is being asked is what you want and need to know in the specific circumstances of the deal. One size does not fit all.

For example, if you are contemplating acquiring a firm that generates business from the corporate, mortgage or protection markets, there will be specific questions to ask.

You will want to know that the clients the firm claims to have actually exist and the income that they apparently generate can be validated.

The extent to which they have a technology system embedded into the business to help manage their back-office and client-facing processes is a useful marker to evidence audit trails, compliance reporting etc. There will be a need to migrate data from their system in the most time and cost-efficient way so the cleanliness of data will also be of interest to avoid problems down the line.

Set out below are the main aspects that you are likely to want to evaluate as part of your DD before making a final decision to proceed with any acquisition.

1. Culture

Culture is the “DNA” of any intermediary business. Not only has the FCA had a lot to say about how important it is in embedding good behaviours, but you will want to know how easily and readily the firm that you are thinking of acquiring can be assimilated into your business and to what extent the people share the same values etc. The greater the divergence, the greater will be the risk of making the acquisition.

2. Capability

If you intend to retain and absorb the management, you will want to confirm that they have capabilities in the areas of relevance to you going forward.

3. Capacity

If the firm that you are planning to purchase has specialisms that you want to utilise but which you do not possess – say for example in relation to later life planning – you will want to confirm that they have the ability to take on more work in this area and have enough qualified staff to provide the requisite level of advice and service.

4. Commitment

Are the management of the firm you are acquiring in it for the short or long-term? You need to know if you are placing any reliance on their skills as part of the deal, for example if one or more of them is a major business producer. Having robust contractual arrangements in place that are specific is key.

You should also take the time to probe why the firm want to sell. Sometimes the reasons given are straightforward and plausible; for example, to retire, or to step back from the day to day management of the firm, and instead to focus on client work.

Sometimes, the reasons are not as apparent; for example, it could be that a major shareholder has a divorce to finance and is selling to meet the terms of the settlement and his or her colleagues are being dragged along. Another possibility is that the management team has fallen out with one another.

You need to know what the real motivations for the sale are to avoid buying an unstable business where advisers may want to leave or clients are not secure.

5. Capital adequacy

You will need to take account of the impact of any acquisition on your capital adequacy position. For example, if you are taking on a firm with discretionary permissions which your firm does not already possess, there will be cost implications to take account of.

6. Clients

The quality, ownership and stability of client relationships will be crucial. Being able to obtain a segmented list of the clients of the firm you are acquiring will be a fundamental part of the DD not least to identify if they are heavily reliant on relatively few clients to sustain their business.

7. Controls

You will want to see demonstrably effective compliance, and (preferably automated) risk management controls and processes in place otherwise you are unlikely to decide to proceed.

8. Centralised Investment Proposition (CIP)

The CIP needs to have adviser charges which address client needs, which are profitable, and also sustainable. However, you may see opportunity to improve the proposition and increase the charges. Remember however that the clients may be resistant at least in the early stages so making aggressive financial assumptions about an increase in income may not be borne out as early after as a deal has been struck as you might want or expect.

9. Contracts

Ensuring what is contracted for is enforceable – both in relation to advisers and outsourced relationships.

10. Consistency

The ability to deliver consistent compliant outcomes through the effective use of technology is an important part of the DD process. If changes are going to be needed in the advice process let alone processing business or in relation to on-going client relationships, this needs to be reflected in the price to be paid.