Due diligence is a painful process. In extreme circumstances, its sheer weight can kill a business. But embrace the idea that due diligence information could be demanded at any time and the discipline it will bring will help your business flourish.
I went through due diligence recently when my firm was absorbed into national entity Succession Group, but I have spent a long time on the other end of the process as a prospective purchaser.
I was amazed at how many advisers did not know the number of clients they had, how old those clients were, what their portfolios were made up of, and what the average assets per client were. Advisers have often not demanded exclusivity, so they do not know the full scale of the potential business opportunity their clients represent.
Purchasing process
Due diligence effectively means confirming all the relevant facts that make up the key metrics of a business. It involves having an up-to-date understanding of what ongoing charges are, and a clearly defined charging structure.
Advisers will need to show their complaints register is up to date and demonstrate they are on top of any problem product areas. The prospective purchaser will also want to see details of the adviser’s professional indemnity insurance and any claims made against the firm in the past five years. Being able to provide this information within a 28-day period is a big ask if it involves data you are capturing on an ongoing basis. If not, you risk putting your best people on the job when you enter the due diligence process, distracting them from the day-to-day job of bringing in revenue.
Managing directors, often the biggest business writer in the organisation, will be intensely involved in the due diligence process, absorbing a lot of their time that could have been spent bringing in money.
If you already run a good management accounting process you are halfway there. My own firm has a dashboard that goes out to every member of staff each week that includes portfolio numbers and assets by provider.
Championing delegation
Due diligence usually starts once both parties have decided the two businesses share a common culture and have agreed on price and terms.
Appointing champions for certain areas in the business is a good way to engage your team in what is happening and share the workload. So if you are receiving a back-office system with new standard letter templates, you may wish to have your practice manager appointed as your administration champion.
The platform expert in your firm may become the platform champion, and deal with the review of the various platform providers. You might want to have your finance manager or director liaising with their opposite number in the buying organisation, overseeing how funds will flow from the parent entity.
Due diligence sounds painful, and it can be. But it is a great way to benchmark your firm, providing valuable management information that should make it more productive.
Run your firm as though it is permanently up for sale and, even if you do not sell, it will be a better business for it.
Due diligence checklist
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Start getting your business ready to deliver due diligence information before you go to market. Better still, always run your business to a due diligence level of management information as it will help you manage your business better.
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Appoint members of your team as champions for different strands of the due diligence and integration process. This will ensure they share the burden, while becoming engaged in the idea of the merger or acquisition.
- Do reverse due diligence on the entity looking to buy your firm. If they cannot give you the same sort of information they want from you, it is questionable whether they will deliver on their promises.
Mark Stokes is managing director of Lewis Chambers Powered by Succession Group.