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Buyer Beware: Key Clauses and Deal Terms to Protect You During an Acquisition

Advisors always enter into an acquisition deal hoping for and expecting the best. If you do your due diligence, your chances of a positive outcome are high, but the unexpected can still happen. To ensure appropriate stewardship of the deal by all parties, as a buyer you need to do everything you can to protect your interests in a way that engages the seller and holds both accountable to a positive outcome.

To help you, we spoke to one of our resource partners, Todd Doherty, M&A Consultant with Advisor Legacy, to get insights as to what terms you should include in your contracts to protect your investment. Todd began by stressing the importance of due diligence. “It’s really important that you take the time to get to know the seller and really communicate your goals and transition plan,” says Todd. “However, there are a few items you can add to your agreement, depending on the rules of your broker-dealer or custodian.”

The first clause Todd recommends including is an Attrition Clause. “The Attrition Clause states that a percentage of the purchase amount will be held in escrow and will be paid out based on how many clients remain after the defined transition period. It can also be held back on a seller note with a delayed start (note starts after the measurement is completed).” Todd continues by saying, “this creates an economic incentive for the seller and motivates them to help you ensure a complete transition and to reduce client attrition.”

In some rare cases, a seller can actively sabotage a buyer either by “stealing back” clients after the acquisition or by engaging in acts of slander and libel to undermine the buyer’s reputation to their clients. In those instances, there are two possible sections a buyer can include in a contract to protect themselves from a rogue seller. The first is a standard non-compete agreement. “The ability to enforce the non-compete is accomplished through allocating a portion of the sale price (2-5%) to the non-compete agreement,” adds Todd who stresses again how that adds a financial motive for the seller to want to cooperate with the buyer. “Sometimes a non-compete is hard to enforce or very limited in scope, depending on the state the agreement is made in,” cautions Todd. “In those instances, we recommend a damages clause which enforces financial penalties for lost clients, especially if those clients were lost due to the seller’s actions.”

Again, the best way to protect yourself is to take your time and do your due diligence. A deal that seems too good to be true can cost you dearly down the road if you don’t protect yourself upfront. It’s always a good idea to engage a lawyer with experience structuring these kinds of deals and who is familiar with the laws and regulations that govern your practice.