Explore the risks and legalities in Mergers and Acquisitions when personal service businesses are involved. Learn from a recent case where a wealth management company faced challenges due to client relationships.
M&A Stories
March 7, 2019
Introduction:
In the world of Mergers and Acquisitions (M&A), the purchase of personal service businesses can be a tricky endeavor. Unlike acquiring a widget manufacturer, the value in these businesses often hinges on the relationships the owner has with their clients. This blog explores a recent case highlighting the risks and legalities associated with such transactions.
The M&A Deal:
In this particular case, a wealth management company acquired another company’s wealth management business. This deal was highly reliant on the strong client relationships established by the seller’s owner.
The Legal Dispute:
Fast forward a couple of years, and the buyer decided to sell the business. Shortly after this announcement, the seller’s owner left to work for a competing wealth management company. The sale was completed, and the buyer’s clients were informed that the seller’s owner was no longer with the company.
The Outcome:
As a result, many clients left the buyer and returned to the seller’s owner. This prompted the buyer to sue the seller’s owner, alleging a breach of the non-solicitation promise.
Legal Verdict:
However, the court ruled that the mere fact that clients moved back to the seller’s owner wasn’t enough to prove a breach of the non-solicitation promise. This case illustrates the inherent risks of buying a business heavily dependent on a key individual, where clients might follow without any active solicitation.
Considerations:
In some states, like California, buyers can protect themselves by having the seller’s owner promise not to compete in the same market for a reasonable period. This protects the goodwill acquired during the purchase.
Key Takeaway:
This case underscores the importance of due diligence and legal safeguards when acquiring businesses dependent on a “rainmaker” figure. It also highlights that sometimes, clients may choose to follow without any active solicitation.
Case Reference:
Sentinel Rock Wealth Management, LLC v. Hartley, Case No. 2:16-cv-01643-MMD-VCF, United States District Court, D. Nevada, (February 28, 2019).
By John McCauley: I help businesses minimize risk when buying or selling a company.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
Legal Disclaimer
The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.
Recent Comments