Page 50 - Investment Advisor April 2021

THE COMPLIANCE COACH

By Thomas D. Giachetti

How to Prepare Your Firm for an Acquisition

Here are the red flags to avoid when readying your firm for that all-important
sale, especially if you want the right price.

ith advisory firm merg- TAX STRUCTURE AND BACK OFFICE
ers and acquisitions at an Rachel advises that tax structure also
Wall-time high, many of our can result in a change in the transaction
clients wonder if now is the time to economics. Because there is generally a
market their firms for sale. The obvious “lookback” period to any change in tax
factors to consider in making this deci- structure, it is too late to make changes
sion are whether the financial multiples if you focus on this at the time of a sale.
are in your favor: revenues, EBITDA, Tax laws change. Thus, reviewing tax
earnings before owners compensation, structure — for both “day-to-day” and
profit margins. Rachel cautions that owners who wait exit purposes — makes the most sense
But other issues that come into play as until they are ready to retire to form on at least an annual basis.
buyers evaluate the feasibility of a poten- a succession plan can hurt a sale as a Most purchasers will focus on client
tial sale should be as important to your potential purchaser will worry that cli- revenue, but “back-office” issues can
firm in preparing for a potential sale. ent relationships will not transition after derail a transaction. These issues include
We have assisted firms throughout the owner leaves. problematic office leases and vendor con-
the United States for decades on such To attain the highest value for a sale, tracts, litigation, poor bookkeeping and
M&A matters. I recently spoke with my prepare ahead with both an internal and record keeping, technology and cyber-
partner, and chair of our M&A Group, external succession plan (even though security issues, failure to protect your
Rachel Lilienthal Stark, to discuss issues the internal plan may not transpire). name and other intellectual property, and
critical to the M&A process. Also imperative is that a firm’s client liabilities not covered by insurance that
contracts are up-to-date, both from a could affect the potential purchaser.
BEST PRACTICES business and legal perspective. Under Before going forward with a transac-
First, if your compliance efforts are nei- the Investment Advisers Act of 1940, tion, have professionals dig into these
ther adequate nor up-to-date, your abili- with “potential” narrow arguments to issues in advance so you can address
ty to attract a prospective purchaser will the contrary, any change of ownership any concerns rather than have surprises
be hurt. Diligent compliance processes of 25% or more will result in a change come up by the potential purchaser dur-
protect both your brand and the value in control, by regulatory standards, and ing due diligence.
of your entity. would trigger an assignment of the The sale of your firm can be one
Also, because the value of an advi- investment advisory agreements. of the most meaningful experiences
sory firm is primarily based on the If your client contract requires writ- in an investment management firm
goodwill of its relationships, the cli- ten consent to assignment, any firm sale owner’s life; therefore, be prepared to
ent-facing employees (both owners and will require affirmative written con- ensure a smooth business transition
non-owners) will be the focus of any sent from each of your clients, without for all parties.
potential purchaser’s inquiries. In fact, the potential ability to rely on nega-
losing professionals who have signifi- tive consent. If written consent is not Thomas D. Giachetti is chairman of the
cant client contact will adversely impact required, a “negative consent” (i.e., no Investment Management and Securities Practice
the purchase price. It is essential to action taken by the client after notices Group of Stark & Stark, a law firm with offices
put strategies into place to prevent have been provided of the proposed in Princeton, New York and Philadelphia that Andrii Zastrozhnov/Stock.adobe.com
this — including restrictive covenants assignment) is potentially permitted, represents investment advisors, financial
and bonus or equity incentives. although we always recommend that planners, BDs, CPA firms, registered reps
Ironically, many firms think about parties first attempt to obtain affirma- and investment companies, and is a regular
selling because they do not have an tive consent prior to relying on a nega- contributor to Investment Advisor. He can be
internal succession plan. However, tive consent provision. reached at [email protected].

48 INVESTMENT ADVISOR APRIL 2021 | ThinkAdvisor.com