Selling your IFA business – traps and roadblocks

In our first insight, we provided an overview of selling an IFA business from the seller’s perspective. In this insight, we explore the more detailed issues that arise and the legal points a buyer and their lawyers are likely to raise once a sale has been agreed in principle, subject to contract.

 Consent to a Change of Control

Where an IFA business is sold through a share sale or transfer of an LLP interest, exchange and completion will often take place separately. The sale and purchase agreement (SPA) will be signed, but completion will usually be conditional on FCA approval of the change of control, even where senior management remains in place.

The buyer will generally lead the approval process, although the target firm may need to participate in the notification. A proposed change of control is notified under section 178 of the Financial Services and Markets Act 2000. The application will require supporting information about the transaction, ownership structure, business plans and financing. Where the Prudential Regulation Authority (PRA) also regulates the firm, a notification to the PRA may be required.

The FCA can take up to 60 working days to assess a complete notification, although many applications are determined sooner.

What happens between exchange of Contracts and Completion?

The SPA will usually restrict the seller’s ability to make significant decisions between exchange and completion. The seller will generally be required to operate the business in the ordinary course and obtain the buyer’s consent before taking significant decisions or entering into transactions outside the ordinary course of business.

Contractual stumbling blocks

A buyer may seek contractual rights to withdraw from the transaction or renegotiate the price if circumstances change. For example, the buyer may seek protection against a downturn in the market or a material reduction in assets under management before completion.

Where a downward price adjustment is agreed, the seller should consider seeking reciprocal protection so that they can benefit if market conditions improve.

In an asset sale involving the transfer of the business, client relationships and other assets, the seller will generally remain responsible for cancelling its regulatory authorisation and dealing with the selling entity after completion. Before applying to cancel its authorisation, the firm must have ceased carrying on regulated activities or intend to cease doing so within six months of the application.

The seller will also need to put the firm’s affairs in order. This may include notifying clients, completing outstanding regulatory returns, paying fees due, resolving complaints and making appropriate arrangements for future complaints and liabilities, including run-off professional indemnity insurance where necessary.

Ongoing Risk for the Sellers post-completion

Claims under Warranties/Indemnities

Sellers typically remain exposed to claims under warranties and tax covenants after completion. The SPA should set out the periods during which claims may be brought, minimum claim thresholds and an overall cap on the seller’s liability.

Given the regulatory risks associated with financial advice, buyers may also seek specific indemnities for pre-completion regulatory breaches or negligent advice, particularly where losses are not covered by professional indemnity insurance or provided for in the accounts. These indemnities may have longer claim periods and fewer financial restrictions than ordinary warranty claims.

In a typical transaction, general warranty claims may be permitted for 18 months to two years, while tax warranty and tax covenant claims may have periods of six to seven years. The buyer may seek an indemnity claim period of five to seven years for regulatory breaches or negligent advice.

Sellers should consider the availability of insurance, their rights to participate in claims relating to pre-completion conduct and whether a buyer is seeking a personal guarantee. In an asset sale, a buyer may seek a guarantee from the former owner to provide additional recourse for certain post-completion claims.

Consideration and Earn-out (Deferred Consideration)

Buyers often pay part of the purchase price upfront, with the balance calculated by reference to the business’s performance over a specified period, commonly two or three years after completion.

The SPA should clearly define the relevant performance targets, how revenue and any additional consideration are calculated, and how disputes over the figures will be resolved. The parties should also consider what happens if the business underperforms in one year but exceeds its targets in later years, and whether performance can be aggregated across the earn-out period.

Where sellers retain minority shareholdings, deferred consideration may be linked to their continuing ownership or employment. These conditions should be reviewed carefully before the seller agrees to them.

Net Asset Valuation and Completion Accounts

Where a company or LLP is acquired, the purchase price may be adjusted after completion to reflect the actual value of the business’s assets and liabilities. This may include working capital and regulatory capital requirements.

The SPA should establish how completion accounts are prepared, the relevant timetable and the process for resolving disagreements over the final calculation.

Selling an IFA business involves complex contractual, regulatory and financial considerations. Gannons can help sellers assess proposed terms, negotiate appropriate protections and manage risks that may continue after completion. If you are considering selling your IFA business, please contact us to discuss how we can assist.