The value of appropriate Due Diligence!

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5 November 2018

How many of us would buy a used car without a test drive or a new home without a valuation? Close to none, we would guess.

So, when it comes to buying a new business or perhaps in this age of consolidation of Financial Advisory firms, selling your existing business, the importance of the due diligence process should not be overlooked.

Most advisory firms perform some level of due diligence when considering their platform or SIPP providers, although experience shows that with some firms, this can be more of a tick box exercise to support a decision already made.

With the current trend for the sales of well-managed businesses with assets under management (AUM) in excess of £100m to generate valuations well in excess of £1.5m, there is a lot at stake for the potential vendor and purchaser meaning due diligence is a matter to be taken very seriously.

The Process

So, after what may have taken days or weeks of negotiations, the commercial side of the transaction is agreed, subject to all being as it seems. The purchaser engages their team to commence the due diligence to ensure that there are no skeletons hiding away and that clients and funds are as expected in terms of numbers and quality. They will also check that the business has been run in a positive manner with customer-focused outcomes at the heart of the business proposition.

There is no intent to seek perfection nor is there a focus on catching people out.

The starting point for this process is the review of the firm’s documents and records;

• Are they available?
• Consistent in content?
• Current and complete?

Significant gaps or out of date MI will begin to make the potential purchaser feel uneasy, a little bit like a missing service history on a high mileage car.

From board papers through to adviser 121’s, KPI’s, and the old favourite of assessing a firm’s quality of advice, the humble file assessment. These all bring to life the culture and approach of the management of the firm.

Are there any external assessments, audits or improvement plans that have been received and can the firm show that they have actively embraced improving any identified weaknesses.

Are risk registers and control frameworks being actively incorporated into board papers? And review meetings providing evidence that risk is not just a four-letter word, but alive and breathing within the firm.

As a Vendor, you do not want the purchaser to have enough concerns to either reduce the offer price considerably or worse still, walk away altogether once they have looked under the bonnet.

If you are considering the sale of your business and wish to understand further how to ensure the due diligence process will be stress-free, speak to one of our team.