Negotiations of deals are this kind are complex and something that Gannons can help you negotiate you way through.
In our first insight on sale of IFA businesses we provided an overview of the sale of an IFA business from the seller’s perspective. In this insight we look at some of the detailed issues which arise and legal points you can expect a buyer and their lawyers to raise once a sale is agreed subject to contract.
Consent to a Change of Control
For IFA sales which cover a sale of a shares or an LLP interest, it is likely there will be split exchange and completion. This means that the Sale and Purchase Agreement (SPA) will be agreed and signed but completion will be conditional upon FCA consent being granted in respect of change of control]even if some of the senior management/personnel functions remain the same.
The buyer will usually take responsibility for obtaining approval FCA approval to the proposed change of control although the notification can be a joint notification which the target signs.
Proposed changes of control are through a section 178 notification (there are forms to complete for this depending on the nature of the entity and change of control). The form needs to be accompanied by other information such as organisational structure chart, reasons for the transaction, whether it is market sensitive, proposed business plan/changes to the business, financing etc. The form can also be used for a notification to the Prudential Regulation Authority (PRA), where it is also a regulator of the relevant firm.
The FCA then has up to 60 working days to assess a change in control (to determine whether it be in the interests of clients and the wider financial services market as a whole) but most notifications are dealt with more quickly than that.
What happens between exchange of Contracts and Completion?
To deal with the period between exchange of the SPA and Completion once approval is given, there will be a number of restrictions on what decisions the seller can take during that period. Essentially, any transactions outside the normal course of business are likely to require buyer consent.
Contractual stumbling blocks
A buyer may seek to insist in contract clauses to include a “get out” or an opportunity to re-negotiate the price.A typical example is if there is a downturn in the economic climate either during the negotiations period or between exchange and completion. The Buyer may also be looking for an assurance that there will be no material decease in assets/funds under management during the interim period.
Given that things may change over time, to the extent there is a downwards adjustment agreed, a seller should seek reciprocity so that the seller will benefit from any upside if the market improves.
If we are dealing with a trade sale, that is a sale of the business and assets under which the clients transfer and possibility other assets such as staff and databases, the owners of the original firm will be responsible for dealing with the cancellation of the authorisation and closure/winding up/dissolution of the selling entity post completion.
Before applying to cancel an authorisation, the firm will have to have stopped carrying on any regulated activities or be planning to stop carrying on those activities within 6 months of the application and will be expected to explain why (eg sale/transfer or assets, winding up)
The firm will also be expected to “leave its house in order” so will have notified clients that it is going to cancel authorisations, completed any regulatory returns and paid any fees due, resolved and complaints and made appropriate arrangements to deal with any further complaints and liabilities that might arise after cancellation of the authorisation (eg run-off professional indemnity cover).
Ongoing Risk for the Sellers post-completion
Claims under Warranties/Indemnities
There are practically always some ongoing risks for sellers on a sale in respect of warranties they give and covenants for tax due, with various protections for the seller in terms of the periods during which claims can be brought and the minimum and maximum amounts that can be claimed.
However, because of the sensitivities around the type of advice given by IFAs and compliance issues the buyer is likely to require indemnities (compensation on a £1 for £1 basis) for claims relating to pre-completion professional advice and failure to meet compliance requirements.
The periods for these will typically be longer than those applicable to the warranties and the minimums and maximums will not apply.
So typically, the periods where a Buyer can claim under the Warranties in a usual transaction will be 18 months to 2 years for General (ie non-tax) Warranties and 6 to 7 years for Tax Warranties – and the period during which the Buyer of a company/LLP can claim under a Tax Covenant (aka Tax Deed) will also be 6 to 7 years. In addition, there will usually be “de minimis” provisions (ie no claims can be brought below a certain limit) and an agreement that the Buyer will never claim back more than it has paid.
In a deal relating other purchase of an IFA business, there will typically be an indemnity so that the Buyer can recover in full (£ for £) for any breach of regulatory requirements and any advice which was given negligently (and is not covered by professional indemnity insurance) and which was not provided for as a liability of the business in its accounts. This is likely to have a longer period for bringing claims than the usual warranty period – so perhaps 5 to 7 years and the Buyer may not be willing to accept a minimum amount before claims are made.
If the sale is of assets and the former owner will not be involved in the business, the Buyer may also look to them for a personal guarantee so that they can recover any amounts due from the individual who owned the business prior to a sale if they have any claims post completion.
There may also be some requirement for ongoing professional indemnity insurance such as run-off insurance to cover this risk in which case it may be possible to agree that the indemnity only applies where sums are not recoverable under the relevant policy. Sellers will typically want to have conduct of any relevant claims or as a minimum some input as regards any claim relating to conduct of the business pre-completion so that they can at least have some ability to protect to the proceeds of sale they have received are due to receive.
Consideration and Earn-out (Deferred Consideration)
Typically where a Buyer is buying an IFA business (whether they are buying the assets/client list or shares/interest in an LLP) there will be some up front consideration with the balance calculated as earn-out so some of the consideration will be calculated by reference to the performance of the business in a specified period following completion. This period is typically two or three years after completion of the deal.
So, for example, there is likely to be a target for income for each of the relevant years over each the earn out is to be measured and additional consideration will be paid if this target is achieved or surpassed in the relevant earn-out period. Consideration will also need to be given to what happens if the Company under performs in one year (because of, say, the impact of an unforeseen event such as COVID-19) but overperforms in the subsequent two years of the earn-out period: will performance be aggregated so the Seller does not lose out because of one bad year? The SPA is likely to include detailed provisions about how the revenue and hence additional consideration is calculated – and there may be a dispute resolution procedure that comes into play if the figures are not agreed.
Of course, if the Seller(s) remain as minority shareholders after their acquisition because the Buyer still wants them to have “skin in the game” their entitlement to deferred consideration is likely to be linked to their % ownership and be dependent upon the Seller continuing to be employed.
Net Asset Valuation and Completion Accounts
A further complication, where a company or LLP business is being bought, is that there will usually be some element of an estimated valuation of assets as at completion (which will include provision for working capital and regulatory capital adequacy requirement) with completion accounts being prepared after completion and an adjustment to the consideration paid depending whether the estimates were above or below the actual values as at Completion.
Negotiations of deals are this kind are complex and something that Gannons can help you negotiate you way through. If you need our assistance, please contact us and we would be happy to help.
Helen is a partner and heads up the corporate team, advising start-ups, SME companies, partnerships, entrepreneurs, investors and shareholders. Dual-qualified in the UK and USA and a qualified solicitor since 1998 you couldn't ask for more experience.