Top 5 things to consider when selling your Financial Services business
min read
Before embarking on the sale process, it’s essential to be clear on what the process involves. In our previous article ‘Top 5 things to consider when preparing to sell your Financial Services business’ we looked at the key steps a seller can take to prepare for sale. In this article, we look at the key steps in the sale process itself.
1. Confidentiality and Exclusivity
Confidentiality agreements (aka non-disclosure agreements) oblige parties to keep transaction-related information confidential and not disclose it to third parties. Ensuring robust confidentiality arrangements are in place is a crucial step in protecting sensitive business information and the value of the business, whilst also maintaining trust between the parties during the negotiation process. For businesses in the Financial Services sector, particular emphasis may be on the protection of client data, CASS information, pricing, algorithms, trade data, and regulatory correspondence. However, there are limitations on the effectiveness of such obligations, and we can advise prospective sellers on additional strategic steps they can take to protect business information, such as use of clean teams, data minimisation, anonymisation, or synthetic data.
Exclusivity agreements require the seller to refrain from negotiating with other possible buyers for a specified period. Typically, buyers insist on exclusivity before committing significant resources to the transaction, as due diligence and negotiation are often costly and time consuming. Where transactions involve regulated businesses, buyers may seek longer exclusivity periods to cover regulatory conditions, and such periods may be expressly tied to transaction milestones.
2. Due Diligence & Disclosure
A buyer will carry out a comprehensive due diligence review of the target company before contractually committing to the deal – including business, financial, legal, and operational due diligence. The aim is to identify actual and potential risks, liabilities, and opportunities associated with the acquisition, enabling the buyer to make an informed decision as to whether or not to continue. Engaging with the due diligence process can be very time consuming for sellers, and taking the preparatory steps set out in ‘Top 5 things to consider when preparing to sell your Financial Services business’ can help to streamline the process.
In Financial Services transactions, specific areas of focus for due diligence may include:
Regulatory permissions and compliance
The buyer will want to fully investigate the scope and adequacy of FCA/PRA permissions, any limitations, variation history, supervisory engagement, open or historical enforcement, past business reviews, remediation, Consumer Duty implementation, financial promotions governance, SMCR mapping, and training records.
Client assets and prudential matters
CASS compliance (audits, breaches, rectifications), PI insurance coverage and exclusions, capital/solvency position (where applicable), liquidity, ICAAP/ICARA, wind-down planning.
Distribution and networks
Appointed representatives and introducer arrangements, oversight frameworks, outsourcing and critical third parties (operational resilience), platform agreements, market data/licensing, and any white-label or affinity deals.
Key contracts
Custody/clearing, IT and cloud (including data hosting locations), outsourcing (FSMA and EBA/UK guidance compliance), benchmark/data licences, key customer and institutional mandates, broker terms, and change-of-control provisions.
Employment
SMFs/Certification staff dependencies, incentive plans, retention risks, and TUPE issues on carve-outs.
IP and data
Proprietary models, trading tools, and data protection compliance (DPIAs, international transfers, DPO reports).
We will delve deeper into the due diligence process for Financial Services M&A transactions in a future article.
In addition to the legal due diligence, the buyer will typically engage other advisors to carry out financial due diligence and commercial due diligence, though some buyers may do this in-house. Commercial due diligence may include reviewing AUM/EBITDA quality, client churn, pipeline/mandate conversion, margin sustainability, conduct risk indicators, and benchmark-relative performance, to provide insights into market position and regulatory/commercial sustainability. When engaging advisors, it is essential that the scope of their due diligence reviews is complementary and doesn’t overlap, and that advisors work collaboratively to ensure the buyer obtains a full picture of the company, its business and assets.
Alongside due diligence, the seller will undertake a disclosure process. The seller will provide disclosures against the warranties set out in the share purchase agreement, by providing information and supporting documents that contradict the statements contained in the warranties. Where matters have been “fairly” disclosed by a seller, the buyer’s ability to bring a claim for breach of warranty is limited accordingly.
3. Change of control approvals
A key consideration in any transaction involving a regulated financial services business is the requirement to obtain change in control approval from the relevant regulator. In the UK, this typically means making a notification under section 178 of the Financial Services and Markets Act 2000 (FSMA) to the Financial Conduct Authority (FCA), and, where applicable, the Prudential Regulation Authority (PRA). This requirement applies not only to firms that are fully authorised, but also to those with limited permissions, as well as businesses involved in consumer credit, payments and e-money, insurance distribution, or investment activities. The change in control process can be complex and time-consuming, and it is often a critical path item in the transaction timetable. Sellers and buyers should work together early in the process to agree a clear strategy for preparing and submitting the necessary notifications, including identifying the proposed controllers, gathering information to demonstrate fitness and propriety, evidencing financial resources, and preparing business plans and governance arrangements for the post-completion structure. In some cases, additional regulatory or competition filings may be required, such as notifications under the National Security and Investment Act 2021, and these should be factored into the overall transaction planning to manage timetable risk.
4. Share Purchase Agreement
The share purchase agreement is a lengthy document that sets out the main terms of the transaction. Typically, a seller will not be able to make a completely clean break at completion. Key points for negotiation for a seller will include:
Price mechanism
One of the first points to consider is the price mechanism. In people-heavy financial services businesses, a locked box mechanism is often preferred, providing certainty as to the purchase price at an early stage. However, in situations where working capital or regulatory capital is subject to fluctuation, completion accounts may be more appropriate. It is important to address how capital and excess cash are treated, as well as any movements in assets under management (AUM) and the risk of value leakage between signing and completion.
Regulatory approvals
As noted above, FCA regulated business will need to seek change of control consent. Therefore, such regulatory approvals will be included as conditions precedent to completion of the transaction in the share purchase agreement. Additional provisions will also be included to protect the parties during this interim period, including conduct-of-business undertakings and information-sharing protocols between exchange and completion.
Warranties
Statements made by the seller about the company which they confirm are true. The buyer will expect the seller to give a comprehensive set of warranties covering all aspects of the business, and for transactions involving Financial Services businesses, specific warranties may cover aspects such as regulatory permissions and compliance, client asset (CASS) arrangements, financial promotions, anti-money laundering and sanctions compliance, implementation of the Consumer Duty, complaints and Financial Ombudsman Service (FOS) matters, oversight of appointed representatives, outsourcing and operational resilience, data protection and cyber security, regulatory capital, professional indemnity insurance, and any past business reviews or remediation exercises.
Tax Indemnity
The seller will be required to pay the buyer a sum equal to any tax liability arising as a result of activity pre-completion.
Restrictive covenants
Limit the seller’s future ability to perform certain actions in order to protect the value of the business being sold. In the Financial Services sector, these covenants will typically focus on non-compete and non-solicitation obligations in respect of clients, key staff, and introducers, and should be tailored to the specific sub-sector and geographic footprint of the business.
Limitations on the seller’s liability
The scope and extent of the seller’s post-completion liability should be clearly defined and limited. This includes financial caps, time limits – for claims under warranties, tax indemnity, restrictive covenants – and other limits, such as limiting liability for matters within a buyer’s knowledge.
5. Warranty & Indemnity Insurance
Warranty & indemnity insurance is an insurance product that can be purchased to reduce the risk of sellers having to compensate the buyer following a claim for breach of warranty. It is typically structured as a seller-initiated buy-side policy, providing the buyer with direct recourse to the underwriter. Who bears the cost of the excess and pays the insurance premium will be a matter for negotiation. We work closely with both warranty & indemnity insurance brokers and underwriters to assist clients with the process of putting such policies in place.
Our team at Charles Russell Speechlys provides expert guidance and support for business owners looking to sell their businesses. We understand the unique challenges and opportunities that the Financial Services sector presents, and we are committed to helping you navigate the complexities of this heavily regulated industry. We invite you to contact Charlie Ring or your usual contact to discuss how we can assist in achieving your strategic objectives.
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