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where the spouses are partners in the business, or perhaps the managing partner has health problems, which may be the reason the business is up for sale. Due diligence is a lot of hard work. Trimble
says, “A couple of hundred pages of due diligence came in at the weekend – all of which has to be read.” Some aspects of due diligence can be outsourced to accountants and legal firms, but most acquiring agents prefer to do much of the work in-house. Winkworth’s team includes the finance director and an experienced compliance officer, though leases go to outside lawyers to be checked. Gonsalves says the first check takes from
three hours to a full day for a single branch business, but he adds, “If we think there is poor administration, we’ll spend up to a week on the premises.” This takes significant resource; Belvoir has three auditors who work on due diligence, and he says, “It’s a real road warrior role. We need someone who can stay away during the week, maybe for a fortnight.” Leaders, too, handles its own due diligence. Weller believes that is a key competitive
“Assessing
sustainable revenues means looking at the main drivers of the business.”
advantage. “You can use a professional firm, but they are expensive and it’s a bottleneck, before you know it you’ve wasted a couple of months. We can move faster.” He also points out that due diligence work can help in planning how the business is going to be integrated post-acquisition. For instance, while doing IT due diligence, his team may find the data needs cleaning up or standardising, and some actions can be taken in advance of the acquisition going through, which saves time later. Outsourcing due diligence would lose this advantage. However when private equity house
Bowmark decided to bankroll Leaders, professionals from Ernst & Young were brought in to do due diligence on the transaction. Richard Hall, transaction advisory services partner, was involved in that process and describes the accountant’s due diligence work as, “Confirming whether there are any
specific risks which need to be addressed by a potential acquirer.” It is very different from an audit or a compliance check, he says. The due diligence process looks at the
maintainable revenues and the assets of the business, and in particular, he says, whether it conforms to the particulars of sale. For a lettings business, he says, assessing sustainable revenues means looking at the main drivers of the business, the scale of the lettings base, average rental levels, and commission levels. “We tend to focus on trends in these key
drivers,” he says, though his team will also look at the profile of property types, how well the agent’s portfolio matches demand, and the pipeline of both landlords and tenants. The due diligence team will look for any areas which appear to be underperforming, where the trends are negative, or where there is risk, for instance if there is a significant concentration of large landlords, who could move elsewhere, or if particular areas of the market are not represented in the portfolio.
RESEARCH REQUIRED The Ernst & Young team tends not to get involved in acquisitions and financing of more than £20 million. Richard Hall points out that the accountant’s due diligence should not replace research on the client’s part. Hall says, “Our due diligence is
“You need to get under the surface of the business and assess its quality, procedures, compliance
and unfair contract terms.” Paul Weller Leaders
24 l June 2012 l TheNegotiator
essentially confirmatory; we shouldn’t be finding out anything new.” Weller agrees. “Leaders has already carried
out a lot of work to establish whether it wants to buy the business before the due diligence process starts, so it should confirm what we’ve already established; it’s not a voyage of discovery.” Only one in ten of Leaders’ potential
acquisitions fall through as a result of due diligence. Rather than due diligence being a pass/fail process, if something is wrong, or a significant risk has been identified, Leaders may ask for specific warranties or indemnities. For instance, it might park part of the consideration in an escrow account until the outcome is clear, so the vendor will only be paid once certain conditions have been met. It is interesting to compare the due
diligence checks with those carried out for compliance by NALS and ARLA. For instance, the NALS application requires an accountant’s report, bank references, and details of client money protection schemes, customer complaints handling, and professional indemnity insurance. Obviously the purpose of the checks is different, but it does give purchasers confidence. What is worrying, though, is that, as Gonsalves points out,“Half the industry is not being policed by anybody in any shape or form.” Given his accounts of due diligence ‘black holes’, the unregulated half of the lettings sector does look rather like an accident waiting to happen. Any acquisition needs to be carefully assessed. Financial black holes are not the only issue, buying a dodgy agency could ruin your reputation. So carrying out thorough due diligence is crucial, and rather than ’never looking a gift horse in the mouth’, perhaps it is caveat emptor –‘buyer beware’ – which is the best motto. l
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