Buying a Financial Services Business – Tips & Traps

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Is there an opportunity for you to buy a Corporate Authorised Representative (CAR) business?  Or even an Australian Financial Services Licensee (AFSL)?  Most CARs and AFSLs are operated via a “Pty Ltd” company and so, if you think that you are ready to go the next step, here’s what you need to know.

Purchasing any business

1. Understand what you are getting into

Now is the time to have a hard look at yourself – do you appreciate the requirements and obligations upon a director of a company?  It is not that hard – but many people get it wrong!  Think about the following:

A. Many small business owners fall into the trap of thinking that the company is the same as them or an extension of them – however, it most certainly is not!  If you are a director of a company, you have obligations to the company, the shareholders (even if you are the only shareholder) and those who deal with it.  You will not be able to treat company money as your own and dip into it for purposes not connected with company business.

B. You must understand the obligations upon the company including holding meetings periodically, making and recording company decisions (resolutions), reporting to ASIC, keeping proper and adequate financial records, collecting GST and lodging BAS (Business Activity Statements) and annual tax returns, ensuring solvency (that company debts can be paid as and when due) and acting in the interests of all shareholders.

C. If you will not be the only director, how well do you know and trust the other director(s)?  Are you confident that you can work with them?  Are they even tempered, congenial, competent and diligent?  Do they have any skeletons in their closets?

D. Will the company have employees?  Do you understand the company’s legal obligations to its employees and the pitfalls and dangers for directors in relation to PAYG taxation instalments, hiring and firing, superannuation contributions and leave loading entitlements?

E. Are you prepared to take on the financial risks?  It is very likely that the company will need business finance to conduct the business. Without exception, financiers will require personal guarantees from the directors of the company (and/or shareholders).  That will mean that your personal assets will be on the line and at risk if the business fails.

F. Lastly, why is the business being sold? Don’t buy a lemon!

OK – if you are up for it, read on!

2. Financial Services businesses

If you have been in the industry you will be aware of the myriad of laws, regulations, regulatory guides and professional obligations.  If you have not, you should probably not be buying a financial services business!

Due diligence is essential.

If buying an AFSL business, you must check (at least):

a) current licence authorisations (do they permit you to provide the services and deal in the financial products that you wish to?

b) whether there have there been any recent additional conditions or limitations placed on the licence?

c) is there any indication of recent investigation or surveillance by ASIC? Look at Audit reports, ASIC media releases, conduct negative media searches.

d) whether there any recent or unresolved complaints from clients? Look at the complaints register and ask about AFCA Complaints – particularly to see whether there is an indication of systemic issues.

e) is the training register up to date?

f) are there: CARs, ARs and employees? What contracts are in place with them? Who is liable for employee entitlements to date? Have they been paid all current entitlements? Are there any claims?

g) are the CARs, ARs and employees trustworthy, competent and reliable?

h) are you able to meet the licence conditions for Responsible Managers, Key Personnel, and the financial obligations?

i) are there clients being purchased with the AFSL business? What certainty is there that they will remain after settlement? Will there be enforceable restrains of trade upon the vendor?

j) is the necessary documentation in place and in order? – Compliance Committee records, Compliance Manual, onboarding documentation, Terms and Conditions, Product Disclosure Statements, Financial Services Guide, Privacy Statement, Authorised Product List, platform contracts etc.

k) what is the value of any indemnities you might receive from the vendor and are they enforceable?

l) does the vendor have “run-off” insurance cover?

m) review of the licensee’s IP documentation.

If buying a CAR business, you should check:

a) will the Licensee accept you as the shareholder of a CAR? And as an AR?

b) is the Licensee’s documentation adequate? CAR/AR agreements, Compliance Manual, Does the authorised product list contain what you need? Are the on-boarding documents suitable?

c) how onerous are the terms of the CAR Agreement? This is very important for you!

d) what are the fees payable to the Licensee and can the Licensee unilaterally increase them?

e) are you purchasing any clients with the CAR business and will you be able to retain ownership of your CAR’s clients after termination?

f) what assurances do you have that the clients being purchased will remain with the CAR?

g) what is the reputation of the Licensee in the marketplace?

h) do the other ARs and CARs have a good opinion of the Licensee and its management? Are the respective personalities likely to be a good “fit” with you?

i) has the CAR had any audit or compliance fails? or sanctions/disagreements with the Licensee?

j) if the CAR has ARs and /or employees, are they trustworthy, competent and reliable? What contracts are in place with them? Who is liable for employee entitlements to date?

k) what are the post termination restraints – will you have the ability to take clients with you if your authorisation ends?

Other considerations for both types of business:

3. You will probably be asked to sign a Non-Disclosure Agreement (NDA) in respect of information to be supplied to you by the vendor in your due diligence investigations. The NDA will also seek to bind your advisers and employees. If you are to give information to a Licensee, you may also wish to have a NDA in place.
4. You may wish to consider whether to withhold some of the purchase price for a period to ensure the business performs as expected.
5. Have your accountants, tax advisers, lawyers and business advisers reviewed the financials, tax returns, contracts/agreement and business plans which are in place?
6. Is your funding for the purchase in place and assured? Do you understand your obligations under the loan agreements? If you will be a personal guarantor of the funding – do you understand the obligations upon you and the personal risks to your own assets which are involved?

And lastly:

Hasten slowly.

There is usually a great deal of optimism on the part of purchasers coupled with plenty of urging by vendors to get the “deal done”.  Purchasers are often unrealistic about how long the process will take – and, of course, the vendors want their money as quickly as possible.  Avoid the temptation to rush the process.  The vendor will always assert that there is a queue of purchasers out there wanting to buy the business if you do not do so.  But if you are not absolutely confident about your due diligence – Do Not Proceed!

Remember these things:

Whatever representations which have been made to you about the performance of the business as inducements to purchase it may well not be able to be relied upon after the sale agreement is executed if there is (as is usually the case) an “entire agreement” clause in it.

Your lawyer’s job is to keep you as safe as possible from unfair or onerous contract terms and to ensure the minimum protections are in place in case it all goes horribly wrong.  There will be a period of negotiation between the lawyers about some of the final terms of the sale and purchase agreement.  This may take a bit of time to get consensus.  Your lawyer is not simply trying to thwart the process and so although the parties may be very keen to get on with the sale, some patience will be required and will generally be repaid.

Tim Dixon (Special Counsel) and Naomi Fink (Senior Associate) of Holley Nethercote Lawyers have experience with all aspects of the purchase and sale of businesses – and particularly financial services businesses.  We can assist with due diligence investigations, preparing and reviewing sale contracts, reviewing existing compliance documentation and procedures, preparing any necessary additional documentation, advising in relation to proposed transactions and all aspects of financial services businesses.


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Author: Tim Dixon (Special Counsel)