Why doing your homework on acquirers matters
3rd August 2022
Getting complete and satisfactory answers to the due diligence the sellers conduct is paramount.
Organisations ranging from the Harvard Business School in the US to the Institute of Directors here in the UK all tell us that most corporate transactions – that is, sales – do not deliver long-term value to the shareholders of the acquiring company, for a variety of reasons.
But what about the company that has been bought? This is likely to be of far more consequence to it because this often represents the company’s life’s work, and it does not have a second chance.
There are a number of steps that sellers can take that should help reduce the risk of selecting the wrong buyer, and consequentially a poor outcome. Here are the main ones.
Ask to see the acquirer’s strategic growth plan
In my experience, unless I ncourage sellers to request sight of the plan, then in some instances they will rely on just the word of the buyer. The plan, if it is well drafted, will provide the rationale for making acquisitions versus organic growth via adviser recruitment and will set out timescales for realising value, especially if private equity funding is involved.
In some instances, buyers will say that their plan is confidential, but as a seller you certainly will have signed a non-disclosure agreement, and a compromise may be for the buyer to share relevant excerpts.
Ask where the funding to make the acquisition is coming from
Following on from the last point, any plan is just that and no more unless there is funding in place to make the acquisitions. In some instances, typically for smaller transactions, the funding may come from retained profits. Otherwise, it is likely to come from bank or private equity funding.
If you are the seller, you want to know what any pre-conditions are; what the sign-off process is for the buyer to draw down on the funds needed to complete the acquisition.
Ask to see the plan for integrating your business into the acquirer’s
This is key. Without effective integration, client departures could result as well as losses of staff, and these could have a knock-on effect on the level of deferred payments. If you are the seller, you have a vested interest, and should not assume ‘it will all be OK’.
Seek access to the owners of other firms that have been acquired by the buyer
Any acquirer that is confident in its previous acquisitions should be happy to offer you access to others that have sold their businesses. If it has bought a significant number of firms, I normally recommend that sellers seek access to a firm that has just completed its sale to give you a view on the process; a firm that has sold, say, a year ago, which will tell you about the integration process, and a firm that sold, say, four or five years ago to give you a view on longer-term aspects.
Research the buyer on Google and websites such as Glass Door and other social media
What you are looking for here are comments and stories about the culture of the buyer.
Ask ‘what if’ questions and if appropriate obtain the answers in writing
As a seller, you will have questions that are particular to you. You should seek written confirmation so that you have an audit trail, and if they will influence your final decision it may be appropriate for there to be specific confirmations in the sale-and-purchase agreement.
Seek the views of your senior colleagues at the appropriate time
If your key staff and advisers are not party to the initial discussions, it is likely that you will want to inform them of your intention to sell your firm before the ransaction is concluded, and indeed the buyer may make this a pre-condition. Its views and buy-in matter and are likely to have an impact on the success of the transaction.
If in doubt…
If after all these prior steps you still have doubts, do not ignore them. Instead seek advice and counsel before you make your final decision.
The sale of a financial planning firm is likely to be the largest financial transaction for most shareholders. Getting complete and satisfactory answers to the due diligence, the seller’s conduct is paramount.
This article was originally published on Money Marketing