Regulatory & Legal Considerations for Acquisitions

Navigating an acquisition, whether your business is acquiring or is the target business, can be one of the most exciting, yet complex transitions for your firm.

In addition to negotiating economics and business considerations, you also must factor in legal and regulatory obligations, fiduciary considerations and culture.

At Jacko Law Group, we help advisors anticipate these challenges, structure deals strategically, and provide legal and regulatory insight for various business considerations every step of the way.

Let’s explore your acquisition journey through a hypothetical case study focusing on 5 key regulatory and legal considerations:

1. Your strategy/goal: determining the “Why”
2. Your pre-acquisition compliance considerations: The regulatory realities
3. Your dream team: Building the right legal team
4. Due Diligence: The necessary homework
5. Post-closing compliance: Establishing a compliance-strong future

Case Study: Wall Clock Advisory: A Small RIA on the Path to Growth

Wall Clock Advisory is a boutique RIA with three partners and $200M in AUM. The firm had built a loyal and stable client base over the years; however, they were ready for more.

The firm was presented with an opportunity to acquire the advisory next door. Lightning Financial Group  was a smaller RIA with AUM of $100M.  Wall Clock Advisory recognized the acquisition as the perfect way to expand their client base and add two experienced advisors to their firm.

The deal suited both parties, creating a clean way for Lightning founder to retire, and for Wall Clock Advisory to expand. However, as the excitement of the deal grew, so did the complexity. Both parties became increasingly stressed with the process.

Here’s how their journey unfolded  and what other advisory firms can learn from their experience.

1. Identify the Why.

Before Wall Clock Advisory killed the deal, they decided to go back to the foundation and clarify their strategic objectives. After careful discussion, they determined their reasons for the acquisition:

• For growth
• For talent
• For continuity planning

With the help of legal counsel, they were able to develop a plan that defined all three objectives clearly and set expectations for the acquisition.

• A clear ownership structure
• Defined responsibilities
• Identification of critical compliance deadlines and successor filings
• Early involvement of tax, compliance, and legal advisors

2. Compliance Considerations

As an RIA, Wall Clock Advisory understood the regulatory requirements that were involved in acquiring the smaller firm, such as:

• Form ADV and disclosure updates
  • The acquiring firm must update its Form ADV and disclose material changes to the necessary parties.
  • The target firm must file an ADV-W to withdraw its registration at the time of closing.
• Employee Transitions & Licensing
  • Form U4s must be updated through the acquiring firm for any employees transitioning from the acquired firm.
• Client Communication
  • Depending on the terms of the client agreements and applicable regulations, consent or notification may be required.

3. Your dream team: Building the right legal team

The right team can streamline the process and ensure that all crucial parts of the acquisition process are addressed. The strongest defense against costly oversight is to form a team of experienced professionals in the following areas:

• M&A counsel
• A tax advisor or attorney
• A compliance consultant

4. Due Diligence: The Necessary Homework

A thorough due diligence is necessary and beneficial for both parties. For the seller, a due diligence can show their firm has a higher market value than previously thought, and for the buyer, it can uncover existing and potential legal and regulatory risks that may need to be addressed or reconsider the acquisition.

In our hypothetical case study, Wall Clock discovered two potential issues during the due diligence process:

1. That Lightning RIA had received an SEC deficiency letter for inadequate advertising disclosures two years prior, and
2. Their IT vendor did not have a written data privacy agreement

The two regulatory issues did not affect the deal, and steps were taken to ensure they would be resolved before the transition was complete, however, if Wall Clock RIA had not performed a thorough due diligence, these issues may have resulted in much bigger regulatory issues.

5. Post-Closing Compliance: Establishing a Compliance-Strong Future

After closing, a firm should focus on establishing a robust compliance program for the newly expanded firm. This includes:

• Providing compliance training for all personnel
• Ensuring all disclosures, privacy notices and records are updated to align with regulatory requirements

Legal and regulatory considerations in an acquisition are fundamental for a smooth transition that protects the parties from financial and reputational whiplash in the future. Although complex, having the right tools and team can substantially affect the outcome.

The Mergers and Acquisition team at Jacko Law Group has extensive experience in helping clients through the process. We provide legal and compliance counsel, establishing a strategy customized to the business and the objective of the transition.

For more information, please contact us at 619.298.2880 or email [email protected].