18/08/2008

As a frequent adviser to buyers and sellers of financial planning and accounting practices we are often asked to assist with the negotiation of the contract for sale.  One issue stands above all others in such agreements and that is how and how quickly the seller will be able to transfer their client base to the buyer.
 
It always comes as a bit of a surprise to the parties involved when we say “as slowly as possible”.
 
Why is the speed of the transfer so crucial?  Because it regulates many of the other important aspects of the agreement.
 
If a buyer could be assured that 100% of the client base would transfer to them immediately on settlement then there would be no need for any retention amount to be held back against those transfers, as is commonly the case, and the seller could receive the whole sale price on settlement.   Such a guarantee is uncommon and so retention sums are regularly used.
 
Likewise, if the clients were instantly transferable then the seller would not need to continue to assist with the hand-over of the business but could go on their merry way immediately after settlement.  Again, because such instant transfers are not possible sellers are required to continue to assist with the promotion of the buyer to the clients in order to ensure the buyer gets the goodwill and client base they’ve contracted to buy.
 
So the issues relating to the transfer of client base make it necessary to deal with clauses that set out in detail how much retention sum is involved, when and on what basis the sum will be released, the method of calculation of how much client base has been transferred at the relevant time, those things the seller must do to encourage the clients to adopt the buyer as their adviser, those things the buyer must do to encourage and convince the clients that they are deserving of the client’s custom and even those things that the buyer must not do lest it result in clients being dissatisfied.
 
There are even clauses that penalise buyers if they behave in a way that might dissuade clients from transferring and staying with the buyer.  For example there should be clauses that require the buyer to provide services in a manner that is no less efficient and of no less quality than the manner that those services had been previously provided by the seller.
 
At the heart of these requirements are two important concepts: firstly, that clients are not cows and secondly that both the buyer and the seller need the buyer to succeed.
 
Clients are not cows.  Surely you’ve noticed.  Apart from the obvious, clients differ from cows in that cows do what they’re told (more or less) and tend to do what the other cows are doing. Clients on the other hand make up their own minds about what they will or won’t do and, at least in the selection of their financial adviser if not in their selection of stocks, will not necessarily do what others are doing.
 
Sellers cannot therefore guarantee that clients will transfer their allegiances to a buyer. Both the buyer and the seller will have to work hard to do everything it takes to ensure that the clients are so convinced of the quality of the buyer that they will choose to use the buyer rather than do so because they are told that they must – an impossibly small likelihood.
 
The seller needs the buyer to succeed just as much as the buyer does. If the buyer fails then the retention sum is at risk and this may be a very material sum.  But as well, many sellers feel a moral obligation to their clients to not leave them in limbo in respect of their financial advice but rather to pass them on to someone who can look after them efficiently and to a standard at least the equal of the seller.
 
So when the sale is being negotiated it should not come as a surprise to the buyer that the seller is making demands of the buyer in terms of the buyer’s ability and preparedness to do what it takes to convince the clients that they can look after the clients’ needs.  Sellers need to do due diligence on buyers as much if not more than buyers need to do on sellers.
 
Buyer optimism and enthusiasm sometimes gets in the way here.  A buyer will often be very keen to take over the business and get on with stamping it with their own personality and ideas.  They will often see the seller as a drag on their future plans and will want to have the seller out of the picture as quickly as possible.  They therefore put pressure on the seller to quickly do what the seller has to achieve the client transfer and then depart; as if the steps to achieve the transfer of client loyalty are both simple and unquestionably capable of achieving that seamless transfer.
 
In fact those steps do not of themselves guarantee success and speed can be a killer in this context. Buyers need to understand that the slower and steadier is the transfer process the greater the likelihood that transfer will be achieved.  It is only when clients become convinced that the buyer is up to the task and that they are happy for the buyer to take over the role that the loyalty transfer can occur.  This never happens overnight but is something that buyer and seller must work steadily over a period to achieve.
 
And of course if the seller is prepared to maximise the transfer of clients to the buyer they can also ask for a higher purchase price.
 
If you would like more information, please do not hesitate to contact Townsends Business & Corporate Lawyers on (02) 8296 6222.