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Seller’s Guideline and Checklist

Overview: Nothing can be more disconcerting for a seller of an advisory firm than not being prepared for the due diligence the buyer will want to perform. The intrusiveness of the process can be minimized if the seller has developed a plan for being fully involved with the buyer rather than playing the role of a bystander.

Selling your business to a buyer not currently in your firm requires significant patience and forethought. The buyer will want to perform an in-depth due diligence on the business and if you are unprepared you will likely find this necessary process extremely difficult. Sellers should know in advance what documents, information and feedback a prudent seller would likely ask for. If you are well informed and prepared it will help to smooth out what many past sellers have said was the most challenging part of selling their firms.

Do not forget. Buyers are potential. They want, and must know all the elements that uniquely make up the value of your firm. If the information you provide is inaccurate, sloppy or not fully disclosed the deal will never reach the closing table or problems will arise after the sale with disagreements, or worse lawsuits.

It may also seem as if due diligence is the buyer’s problem. Some sellers would go as far to say that if the buyer failed to unearth a material fact that benefited the seller, oh well. That is not only dishonest but a huge mistake. For example, if the buyer couldn’t detect that some of the client base was disgruntled because of poor service in the past, they may have naively agree to pay the asking price the seller wanted. However, it will not be long after the acquisition before the buyer finds this out and the outcome is likely to be an unpleasant experience for the seller.

There is nothing to gain when either a buyer or seller misrepresents or conveniently allows the other party to misunderstand a value issue related to the acquisition. Because these types of acquisitions are rarely paid for in all cash, but structured at least in part as some form of future payments, the seller is the most penalized party by a buyer’s poor due diligence. In fact, the best prevention against any future problems comes from a seller who is willing to make sure all the necessary information is fully disclosed and discussed in advance of the business purchase. This is equally true if that requires you to guiding a novice buyer through the process that does not have due diligence experience.



Where to Start Your Preparation

The best place to start in preparation for the buyers’ due diligence is to review a list of items that the buyer will typically want to examine in the process.  Another category of frequent concern to a buyer performing due diligence is to understand how the seller markets to the investors in the community the firm operates in. Many advisors have in their heads, but not on paper, how they market to potential clients and how they get them into the door. The buyer will want far more information in writing on this important “value driver” that what is in your head.

Creating your own checklist from the Buyer’s Due Diligence Checklist will be the most efficient method of preparation to help facilitate the buyer moving through the process at a reasonable speed. Additionally, your separate list will likely provide certain information the buyer simply did not know to ask for and this alone will be helpful in minimizing any future misunderstandings.

Another benefit of developing your own list is that it will serve as a tool to help support the purchase price and terms you want from the acquisition. Identify both the tangible and intangible aspects of your firm such as its brands, market niches, seminar systems, client management programs, and other processes and systems that may bring increased value to the buyer.

Sellers who take a proactive approach tend to manage the due diligence process better and are far more successful in closing their deals than those who choose a reactive approach to the required exchange of information.

Sellers should also be reminded that the due diligence process is not a one-way street. Separately review the checklist the buyer has prepared from the perspective of performing your own due diligence. After all, the buyer should have to justify why his experience, skills, business acumen, and his firm’s capabilities make him the right candidate for the acquisition.

Performing due diligence on the buyer will help you better structure the transition period and negotiate the fine points of your deal.

Be diplomatic and clear-headed in preparing an advance list of items you wish to request from the buyer at the same time you are presented with their due-diligence list. Hold a meeting with the buyer to review and discuss the lists, cross checking each for completeness. Both parties should then establish time lines to gather and deliver the information that are realistic, but also recognizes the need to move the process to completion.

Below is a list of issues related to the due diligence process that sellers should keep in mind:

  • Request a minimum initial down payment or earnest money before opening your financial records to a buyer (it can be refundable or non-refundable). The larger the practice, the greater the down payment you should receive.
  • Discuss and ask to secure an agreement provision that pays a certain percentage of revenues from any referrals you send to the buyer post-sale, which will increase the total value of the deal.
  • Decide if there will be a non-solicitation or non-competition agreement involved in the acquisition. Determine reasonable guidelines that both the buyer and you can live with.
  • As a seller, always have a back up plan – be it another buyer or being prepared to stay on if the deal fails. Never, ever, put yourself into a “must sell” circumstance.
  • When using and earn-out in your deal, lower your risk by asking the buyer to pay for the purchase price in a shorter time frame, such as within two to three years after the sale, versus a longer period.
  • Be forthcoming with any compliance issues or pending client disputes in your firm. They will crop up later if they exist and you want to avoid any future litigation because of the lack of disclosure.
  • Make sure the buyer has all the required registrations and licenses required to work with your client base, and that the buyer is in current compliance. Ask for and review the buyer’s compliance and audit history. Ask for and review any correspondence from federal or regulatory agencies regarding any past actions taken on the buyer.
  • Ask for full disclosure and copies of any client complaints, lawsuits (pending or historical), and any judgments and decrees in which the buyer or their business has been involved.
  • If the buyer has a different broker-dealer than yours, take care to know early on whether that is a problem. If the transaction is based on that premise and they are not willing to move their firm into NEXT Financial Group that may be a deal killer.

In sum, no one knows better than you the hidden value aspects of your business. Therefore, it is your duty and not only the buyer’s to reveal every unique aspect of your firm to justify the selling price and the terms your seeking.

Being focused and engaged with the buyer throughout the due diligence process in this manner will give you much higher likelihood of success.



Five Additional Factors That Will Determine the Success of an Acquisition

Factor # 1- Recognize that the core value of your firm is first and foremost the client relationships.
Clients who have come to rely on you personally, rather than through transferable processes and systems will be difficult to shift to a buyer. Also, according to your individual circumstances, understand what role your employees may play in the client transition.

Factor # 2 - What is the “total” business value to the buyer?
What is transferable and what is not? The more you understand the transferability of your firm’s assets, the better prepared you will be in pointing out the total value of your firm.

Factor # 3 – What are your buyer’s motives?
Remember, it isn’t just what you have for sale, but what type of buyer you’re working with. Selling to a strategic buyer, who is focused on the synergies your firm will add to theirs, is very different from selling to a financial buyer who is mostly focused on the net return of the acquisition.

Factor # 4 – How will the buyer pay for the acquisition?
How one pays for the purchase of your business will impact the ultimate value you receive. Know these options and outcomes in advance.

Factor # 5 – What type of business entity do you have and what are the taxation issues related to the acquisition?
Your entity type and how your sale proceeds will be taxed will greatly affect the final net value you can extract from your business. Work closely with a tax professional to understand how the allocations of the purchase price and the payment terms will impact the acquisition and the total net value you will receive.

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