Due diligence vital in new buyer’s market
The Royal Commission final report, the release of which is hotly anticipated later today, may intensify the effect that both the Commission and the Financial Adviser Standards and Ethics Authority (FASEA) have had on the way financial planning businesses are bought and sold.
Changes that could gain momentum following its release, according to the Fold Legal, include:
- The buyer’s market would continue, with the supply of client books and Australian Financial Services License (AFSL) companies in greater demand;
- The movement away from larger dealer groups to AFSL companies and shared services hubs; and
- New ways to value businesses, use price adjustment mechanisms and structure payment terms.
Senior associate at the Fold Legal, Katie Johnston, said that buyers and sellers needed to focus on their due diligence, deal structures, and contract recording considering these changes. The most important factors to consider during due diligence were what is at risk, the target, and the buyer’s budget.
“If the purchase price is relatively low, buyers may try to rely on the warranties and indemnities in the transaction document to cure all unidentified ‘evils’,” Johnston said. “However, buyers will get better protection by identifying issues in the due diligence phase and adjusting the deal for these.
“Buyers can generally limit due diligence investigations to clients they want to buy and take ‘the good’ and leave ‘the bad’. At a minimum, buyers should confirm the seller is the legal owner and that there are no encumbrances registered over the business that may impact the buyer’s title.”
Proper due diligence could help both buyers and sellers determine whether to talk away, what warranties to include, and what price adjustment mechanism was appropriate, while the latter should use it to work out whether they need conditions precedent, to restrict the business between buying and selling, and whether specific indemnities were necessary.
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