"Would You Like A Licensee With That Book?"

Given the number of licensees leaving, and therefore the prima facie opportunity to acquire licensees, I thought we would consider this in some more detail.   We discuss some of the legal considerations below and will deal with some of the insurance issues in our next article. 

Source: Adviser Ratings -Licensees excluding Forex and Timeshare representing 23,507 advisers.

To recap - How can I buy a licence?

1. First of all, you can’t! However, you can acquire an entity that holds the license, and you can change the owners and responsible managers of that entity.
2. However, as soon as the ownership or key individuals within a licensee changes, ASIC must be notified.
3. As it is likely the new owner will replace the outgoing licensee, ASIC will need to be notified and all of the information to test the suitability of the new entity and Responsible Manager will need to be provided/reviewed. ASIC then consider the impact on the business and whether it may retain the licence previously given.

So why go down this path vs going through the “front door”?. We asked Katie Johnston, from The Fold who shares her view, “From our experience, following the traditional path of obtaining a licence from ASIC generally takes about 6-8 months (possibly longer). The key motivation for buying a licence is to shortcut this timeline.”

In other words - buying the licensee means buying the processes and systems that have been put in place and previously considered by ASIC to ensure the licensee can act in accordance with the Corporations Act. 

So if the license application process is twofold – people/skills/their bona fides and processes then you still need to jump through 100% of the people issues while relying on the previously created process issues. (Sorry to many professionals who assist businesses in applying for licenses with my oversimplification).  In the right situation, this is worth it, creates value in a licence above simply a book of clients and creates value in the hands of an existing licensee.

We note that advice can be given under the license while ASIC reviews the information.

Do the legal due diligence (DD) to protect yourself

If it makes financial sense to buy the licence and book combined, then make sure you retain the value of this by doing a detailed legal DD and resulting structuring:

1. Katie Johnston says that “Exposure to historical non-compliance can be fatal for purchasers and should be an important aspect of buyer due diligence. A buyer can be liable even if that buyer was not operating the business at the time of the non-compliance. So before you purchase a business that holds a licence you need to make sure the compliance records and policies are up to standard. In our recent blog, my colleagues and I share 4 steps buyers should take to minimise their compliance risk.
2. Katie continues “Due diligence needs to be multifaceted. Obviously, historical non-compliance is incredibly important, but other more general due diligence should also be undertaken and its importance to do so recognised – given a licence purchase is a ‘whole of entity ‘acquisition (‘warts and all’ or ‘skeletons and all’!). Due diligence will help inform the buyer on critical points such as whether to walk away, build in conditions to the agreement (for example in relation to the Responsible Manager on the licence) or impose additional warranties or indemnities on the seller to try and increase protection and limit risk, see my earlier blog.
3. Again, insurance issues will be dealt with in a later article.

 Opportunity

1. For a buyer if you are planning to self-licence anyway and the book and licence together adds real value, then you can transition existing clients to your new self-licensed structure subject to risk protections.
2. The handover will therefore be more detailed than that which is expected in a book sale. It will include the processes, reporting and management that underlie the ASIC approved licence structure.
3. For a seller you may wish to leave the industry due to education deadlines or other reasons but wish to retain some ongoing participation in the business and ensure some client protection beyond a simple handover. You may then wish to retain the Responsible Manager roles over an extended period even if during that time the handover of that role will be passed on to the new owners.

The takeaways

1. Acquiring a combined licence and book of clients can be a valuable course of action if the risks are understood and protected (one can never protect against all knowns and unknowns however the current regulatory landscape is strongly focussed on historical wrong deeds).
2. Be prepared – know what you are getting yourself in for. Only do this if you are comfortable that self-licensing works for you and that you or your team have the necessary skills to satisfy ASIC.
3. DD and structuring is key. Work with the right parties.

If you are interested in change of control transactions with or without attached licenses, please reach out to Jason on jason@adviserratings.com.au.

Article by:

Jason Shepherd

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