The UK professional services industry has weathered the shocks of the global pandemic, the ongoing security situation, and the ensuing economic downturn, and has gone on to record strong performance with mergers and acquisitions (M&A) in the sector. To stay relevant and competitive, many companies are flexing and enhancing their business models to offer new services, expanding their footprint or streamlining support functions. This has resulted in an increase in new acquisitions, spin-offs, and joint ventures. Professional services firms have also seen strong interest from private equity buyers who see strong returns as a haven for investing their capital, with deal volumes in accountancy, consulting, and engineering on the increase.
In the legal sector, while the mega mergers of 2022 are possibly past news, more strategic acquisitions are still being targeted, with small boutique commercial and private client firms at the top of the list. Professional consultancy services are acquiring technology platforms to bolster client service offerings. In facilities management, deal flow at the end of 2023 is expected to continue, with technology-led acquisitions for buildings owners. Acquisitions in building energy management and control are also on the up, due to increasing regulation and focus on ESG1.
Buying a business may be a great way to grow the company, but the success of an acquisition can be impacted by a number of challenges, including the following:
- Uninsured or underinsured losses, where the event occurred pre-completion, but comes to light post completion, for example a cyber event versus the cyber insurance protection purchased.
- Increases in the target’s cost of insurance going forward that will impact the profit and loss and balance sheet.
- The target’s cyber security maturity is insufficient to protect the business.
- Insufficient recourse given by the seller for financial losses arising from unknown and unforeseen breaches of warranty and known, identified risks.
Similarly, directors also need to consider the impact sale contracts may have on their own liability when finally exiting the business.
Companies embarking on acquisitions need to consider several key risk issues. Outlined below, are some essential risk and insurance questions a buyer should consider during acquisition:
1. Is insurance cover available to pay for claims made post-completion which relate to pre-completion events?
2. Have all future insurance costs been identified? For example, the cost of purchasing the ‘right’ cover going forward, the impact of an adverse claims experience, the cost of losses below deductibles, or accrued liabilities and any one-off costs?
3. Will the current and planned cyber security capabilities meet the future needs of the business.
4. What protection is the seller proposing for its warranty and indemnity exposure under the draft Sale and Purchase Agreement (SPA)?
Conversely, if considering a divestment, it’s important to ensure that the target is ‘sale ready’, as this will support an efficient sale process, mitigate risks, and help to protect value.
The proceeds from selling all or part of a company are often used to finance a future acquisition, invest capital into the existing business, or to realise cash for retirement purposes. However, the seller’s ability to use the sales proceeds as they had planned can be impacted due to the following:
- Not achieving the best price for the business as a result of potential red flag issues and/or lack of good quality and robust information.
- Retaining residual liability for warranties and indemnities given to the buyer, and the need to post funds to an escrow account.
- Unforeseen/unquantified related separation costs being retained by the seller.
Key risk and insurance questions a seller should think about when considering a divestment include:
5. Are there any red flags that may result in purchase price adjustments or bidders walking away from the transaction?
6. Is target specific exposure information, including ground up loss experience available to enable potential buyers to bid with confidence?
7. Have you considering using Warranty and Indemnity insurance or Specific Risk insurance as a means to exit the sale with minimal post-closing liability?
8. Does the Sale and Purchase Agreement reflect the seller’s strategy for dealing with historic liabilities?
Getting an acquisition or a divestment right can be game-changing; getting it wrong can be costly and may ultimately threaten any value derived from change, as well as damaging the firm’s reputation.
1 https://www.grantthornton.co.uk/insights/facilities-management-review-q4-2022/
