Buyer Protections During An Acquisition
Acquisitions are an excellent way to scale your financial practice and achieve rapid growth. As with any purchase, there is always the danger that something will go wrong. It’s good to hope for the best, but smart advisors know to also build certain protections into the deal in order to preserve their investment and maintain a strong relationship with the seller and their clients.It’s always best to seek the advice of a trusted acquisitions expert or attorney, but as a starting point, here are a few common protections we see baked into acquisitions deals.
Many acquisition deals include some form of aclaw-backor look-back provision. It is one of the most commonand straightforward protections against client attrition; especially for sellers looking to exit the business within 1 year or less after the sale. In the simplest terms, it’s an agreementbetween the buyer and seller that allows for an adjustment to the purchase price based on client retention at the end of a predetermined transition period following the sale (i.e. 12 months). To accommodate this provision, a portion of the selling price is held back, retained in escrow, or held as a seller note in order to provide financial incentive to the seller to assist with the client transition and maximize client retention. While there is typically an attrition allowance ranging from 5% – 10%, those remaining funds owed to the seller are then paid at the end of the claw-back term based on what percentage of clients are retained by the new owner.
We often see these provisions in the RIA space, though they are not uncommon in the IBD space either. Generally, they are structured over a term of 3-5 years and are a good option if you have a seller who wants to stay on longer than one year, such as in a “sell and stay” scenario. This scenario has become more appealing as it allows both parties to extend the transition period and gives the new owner time to build rapport with clients and staff, which generally leads to lower attrition rates. Lastly, this can further incentivize the seller to bring on new clients or uncover new assets from the existing client based during the period in which theyare retained.
Non-Compete and Non-Solicitation
Many advisors are familiar with the non-compete and non-solicitation clauses as it relates to their own employment agreements. They are also useful instruments in acquisitions and add an extra layer of protection against client attrition. Non-competes generally extend for 3-5 years. Non-solicitation generally last for 3-10 years and are not bound by geographical limitations.
Again, these are just a few of the protections we commonly see in acquisitions. It’s always best to seek out the advice of an experienced acquisitions consultant and/or an attorney. You may also need to work with someone inside your broker dealer to help you with any rules and requirements specific to your platform. These at least give you a starting point and some things to discuss with your acquisitions team.