Useful Information
All registered firms (both Buyers and Sellers) will received a free sample Heads of Terms template and Due Diligence checklists. We have included some further commonly asked questions below.
Can I retain the existing business name to create some form of continuity for purchased clients?
Can the purchased company become an Appointed Representative?
What physically happens to ongoing renewal income on transfer?
Is there a simple way of accounting for existing renewal income so this can be separately identified on future commission statements?
What options are we likely to have in terms of how we structure the new business in terms of providing ongoing advice?
How do I resign from FSA following the transaction being concluded?
What happens to my existing PI cover should I transfer?
How is goodwill treated and what accounting issues can occur?
How does taper relief work?
Can I retain the existing business name to create some form of continuity for purchased clients?
It is common for the directors of an IFA business which has traded for a number of years, to wish to retain their “identity” in some shape or form upon transfer. The most common means of achieving this is for you to add an additional trading style or trading name to your existing company. For all intents and purposes the clients will still see this trading route as a form of business continuity. As the purchasing company, you should notify the new trading name to the FSA and amend your Consumer Credit Licence and Data Protection Licence to cover the new trading name also.
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Can the purchased company become an Appointed Representative?
You can do this, however, in most instances this would mean the purchased business continuing to trade, with potentially both you and the purchased IFA responsible, in the FSA’s eyes, for past business liability. A more viable option could be to set up a new Limited Company as an Appointed Representative of your firm, if the arrangement required the purchased company to trade as a “separate entity”. The trading style option is usually the preferred option.
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What physically happens to ongoing renewal income on transfer?
The Product Providers and Unit Trust Providers will continue to pay the ongoing renewal commission to the original firm until such times as they receive a “Novation agreement”, and/or the company is no longer authorised by FSA. On conclusion of the purchase agreement, it is recommended that the purchasing company and seller both sign a “Novation Agreement.” This requests the Product Providers and Unit Trust Providers to transfer all of the existing renewal commission from their existing agency to your agency. This avoids the need for mandates from individual clients, which not all companies will accept in any case.
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Is there a simple way of accounting for existing renewal income so this can be separately identified on future commission statements?
On your instuction, it is common for a “sub agency” to be set up with each of the Product Providers and Unit Trust Providers. This will allow existing renewal income along with any new business income to be more easily identifiable.
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What options are we likely to have in terms of how we structure the new business in terms of providing ongoing advice?
This will naturally be one of the points you will want to discuss with the seller, but there are a number of options in this regard. The following are the types of questions you should be considering:
- Will you require one and/or all of the Principal’s of the business to remain “involved” in the new company to maintain some form of continuity for existing clients? Depending on your own circumstances, this may be either as an adviser or purely as an introducer. Either way, a mutually acceptable income sharing arrangement would be agreed;
- You may or may not wish to retain your existing advisers. How important or critical is it for these individual’s to be retained within the new business?; and
- How important or critical is it for existing administrators to be retained within the new business?
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How do I resign from FSA following the transaction being concluded?
Nearing completion of the sale you should apply to FSA for cancellation of your Part IV Permission. The FSA are allowed a period of 6 months to grant this, but usually if no matters are outstanding, such as your RMAR, then this would normally only take a few weeks. The Cancellation Form can be obtained at http://www.fsa.gov.uk/pubs/other/cancellation_form.pdf Please be aware that this form requires you to confirm that certain actions have taken place, before submission, for example, you have notified your clients of the decision to transfer. There is no FSA fee for cancellation of your Part IV Permission.
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What happens to my existing PI cover should I transfer?
Once your existing company has stopped trading and is de-authorised by FSA then you are no longer required to maintain PI cover.
As previously outlined, if you previously traded as a conventional Partnership or Sole Trader then you remain personally liable for any future claim. In such a case, you should consider carefully the cost of obtaining “run off” PI cover to protect you in the event of any future claims.
One other factor that you should be aware of, in the event of cancelling your PI policy, relates to whether you pay your existing premium by an instalment scheme. A contract of insurance, like a PI policy, is an annual contract which normally requires payment for the remaining months of the contract if it is terminated early, if you pay by instalments. You should consult with your PI insurer, at the earliest possible opportunity, to ascertain how they would handle such a situation, as it may possible to waive the remaining premiums in certain instances.
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How is goodwill treated?
There is an accounting issue concerning the purchase of goodwill which will impact on the purchasing company.
As highlighted earlier, the purchasing firm often only acquires the client bank associated with the selling company and the accounting treatment of the acquisition in these circumstances is to include the value of the client bank and agreed purchase price on the balance sheet of the purchasing company.
The client bank is included in “goodwill” as an asset of the company and the associated purchase price shown as a liability in creditors. This treatment presents difficulties where a purchasing company is authorised by the FSA. The FSA Rules in this regard are unique, in that goodwill is treated as an intangible asset on the balance sheet of the acquiring company. The FSA deduct this as part of their capital adequacy calculations as per the table below. Please note this table applies to Article 3 firms only.
|
Paid-up share capital (excluding preference shares redeemable by shareholders within 2 years)
Share premium account
Audited retained profits and verified interim net profits
Revaluation services
Short-term subordinated loans
Debt capital
|
Less
Intangible assets
Material current year losses |
For example, a purchasing firm may have a balance sheet showing net assets of £23,000 before an acquisition, satisfying in full their own funds requirement. They purchase a client bank for £120,000 which maintains the net balance sheet for accounting purposes of £23,000 because the goodwill matches the liability, however when calculating capital adequacy, the goodwill is excluded resulting in a negative balance sheet of £97,000. The company then fails it’s own funds requirements.
Unless your accountant is familiar with capital adequacy requirements and calculation methods, they may not be aware of possible solutions.
Depending on other assets on the company’s balance sheet, and the value of the client bank being purchased the purchasing firm could enter into a subordinated loan with the FSA which has the effect of transferring some of the liability into an asset. Where a subordinated loan is not possible, a two company structure can overcome the problem by keeping the goodwill value and liability away from the authorised entity.
A separate company would be incorporated to acquire the client bank – the new company would not be authorised by the FSA, and would, following the acquisition enter into a licensing agreement with the existing FSA authorised company. The agreement would enable the existing company to deal with the new client bank in the usual manner in return for a monthly fee to meet the liability for the client bank.
The balance sheet of the existing company remains exactly the same – in the above example it would stand at £23,000 with the good will and liability of £120,000 sitting on the balance sheet of the new company.
The FSA have informally accepted this arrangement, although you should be aware it comes with additional accounting compliance requirements and corporation tax complexities. In other words, do not be surprised as a seller, if the sale agreement happens to be drawn up between you and a holding company associated with an existing FSA authorised firm. This is likely to be put in place to get round the FSA capital adequacy difficulties.
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How does taper relief work and what accounting issues can occur?
You will be aware that business asset taper relief is available where business assets/shares in an unquoted company are being disposed of possibly reducing the capital gains tax charge to 10% for the owner of the shares.
Where a purchasing company only acquire the client bank the company is then treated as making the disposal rather than the individual triggering a corporation tax charge rather than a CGT charge.
This is a complex tax situation where advice needs to be taken – our tax partners. experienced in the sale and purchase of IFA firms. are perfectly placed to assist.
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For more information, including your free Heads of Terms and Due Diligence checklist please contact us.