All too often, practice buyers do not cover off all the important steps of a potential transaction. There are a number of challenges for acquirers in the due diligence process, and there are three steps that they should be looking carefully at in order to overcome these challenges.
The first and most important consideration is in understanding what the client base looks like. Most buyers look at the geographic spread of the client base, some look at the demographic spread of the client base, but very few look at what I would refer to as the cultural aspects of the client base.
Do you know where the clients come from? Who do they deal with on a day-to-day basis? How do they engage with the practice? How do they engage with their own peer group? How can you as a service provider meet the needs of the friends of the clients that you’re buying? These are all important questions for any potential buyer to ask – and not all financial planning practices have clear answers to these questions.
The second due diligence challenge for buyers is in properly understanding the business they are looking to acquire. What I’m finding is that not enough work and time is spent on not only understanding the present corporate structure of an acquisition target, but also how to evolve that to take advantage of tax concessions to effectively manage current liabilities of the business as well as making sure there is a smooth and seamless transition in equity arrangements for staff.
The third challenge for acquirers lies in the often secretive nature of the early stages of a potential transaction. This challenge relates to the cultural alignment of the two practices, and in particular, key staff. We’ve helped some practices through the early stages of this due diligence process, whereby the employee base is profiled to ensure there is a cultural alignment between the needs of the existing employees, the culture of the existing business and the cultural needs of the potential acquired business. Acquisitions of this nature can sometimes traumatic for employees, whether they are on the seller side or the purchaser side.
In addressing this challenge and the other issues around alignment of the client base and understanding the corporate structure of an acquisition target, good quality expertise can play an important role in making sure due diligence is thorough and the transaction is as smooth and seamless as possible.
