'If you don’t have a well-drafted contract in place, all it takes is for one major thing to go wrong,' says Shayna Beeksma, founder of Beeksma Law in Hamilton.Candra Schank/Supplied
When advisors buy or sell a book of business, lawyers are at the forefront of these deals.
Shayna Beeksma, founder of Beeksma Law Professional Corp. in Hamilton, specializes in making these acquisitions a reality, advising buyers and sellers on how to protect their interests.
Globe Advisor spoke with Ms. Beeksma recently about the legal side of advisor succession.
What’s the difference between an asset purchase and a share purchase?
In an asset purchase, a buyer acquires specific assets and assumes only the liabilities they agree to, such as a client list, contracts or goodwill. The seller retains the company itself and any liabilities not explicitly transferred.
In a share purchase, the buyer acquires all shares of the company, effectively stepping into the seller’s shoes and assuming all assets, liabilities and contracts, including unknown or contingent ones.
What types of book sales are most popular?
Most are asset purchases. Share purchases benefit sellers because of the tax benefits – the lifetime capital gains exemption being the most notable. But buyers want asset deals to make sure they’re just getting the assets, the revenue rights and goodwill, and not an iota more.
What do buyers and sellers underestimate about the acquisition process?
The amount of paperwork involved. They tend to come into these transactions with a letter of intent and think that once they get the purchase agreement done, that’s it. They’ll think of the client list, but they’re not thinking of all the other schedules.
This documentation is required to make sure everything is addressed, all contractual terms are fulfilled and, most importantly, that the buyer or seller is protected in the event anything goes awry.
For the most part, these files are all done electronically these days, but if you were to print them out, you’d be easily looking at 100 to 200 pages.
Often, buyers and sellers haven’t considered several factors. They may think about the possibility of some clients leaving within a year or so, but they aren’t thinking about incapacity or death of either party during the course of the closing process, especially if there’s a payment plan. They may not be thinking of all the representations and warranties that are critical in a transaction.
What types of schedules do you need to prepare?
Schedule A tends to be the client list. I’ve had a couple of deals in which the client list was so sensitive that it wasn’t even included in the schedule. The buyer and seller exchanged a hard copy internally at their office.
We then prepare around five other schedules that cover everything from a promissory note to secure payment, a non-competition agreement, a non-solicitation agreement and an employment agreement.
With a share sale, we need documentation to deal with shareholders and directors. A servicing advisor agreement would account for expectations during the transition period, particularly during any incapacity of the seller.
What is a worst-case scenario you’ve heard about recently?
Some of my clients have heard about a buyer purchasing a book from a seller, in which the seller retires but returns after a few years and tries to poach the clients. In those cases, the transaction was typically based on trust. If the contract didn’t provide protections for the buyer, then the buyer is holding an empty bag.
If you don’t have a well-drafted contract in place, all it takes is for one major thing to go wrong. If you can’t work it out amicably with the other side, then you’re in court. Lawyers do not operate on the basis of any unwritten understanding between the parties. We operate on the basis of what’s in the contract.
Do you see issues when a transaction is through the same dealer?
These deals tend to emanate from longstanding trust relationships between the advisor and the dealer. If the dealer is buying the book, the advisor may think, ‘Of course, the dealer will have my back and it shouldn’t take more than a cursory look from the lawyer.’ But later, the advisor is often surprised at how buyer-centric the agreement turns out to be.
This interview has been edited and condensed.