Seller beware

24 June 2019

RB Capital's Julian Buhagiar warns executives negotiating a sale of the importance of doing due diligence on prospective acquirers, as failure to do so can lead to serious issues post-acquisition

In M&A, as in gambling, sometimes you can push your luck a bit too far. On June 18th, MaxEnt NRR Entertainment’s remote casino and remote gambling licence was revoked by the GB Gambling Commission, amid concerns on source of funds used to acquire and support the licence of the newly merged entity. MaxEnt has disputed the GC's verdict and plans to appeal the decision.

Whilst this couldn’t have come as a complete surprise, it has nonetheless raised eyebrows in the investment community as to the delicate balance between company acquisitions and retention of their existing legal and regulatory entitlements.

What seems to be especially concerning is the apparent lack of due diligence on the buyer (MaxEnt), at least insofar as the origin of their wealth and the ownership and details of their ultimate beneficiary owners (UBOs).

Such information would be the first aspects any exiting regulator would query to ensure the licence in question would still be valid. Assuming this would carry on regardless of the change of control is disingenuous and, in this case, dangerous.

This most recent episode has accentuated the ‘seller beware’ syndrome, or rather the importance of also choosing the right buyer besides just ensuring the commercial terms are right. This article will thus focus on the importance of shortlisting the right buyer, and what that means from a seller’s perspective.

First off, don’t negotiate with a buyer directly, even if – actually, especially if – you already know them. This might seem counter-intuitive, but a lot of issues stemming with (lack of) buyer KYC emanate from reduced due diligence conducted based on familiarity.

If the buyer is not known to the seller beforehand, rest assured the former will conduct all the due diligence required, often through specialised brokerages, and ensure any issues found will affect the final sales price as well as your liabilities to that effect.

So, it only makes sense for a seller to engage in a similar amount of effort, if only to ensure they are protected from all legal and regulatory aspects.

Secondly, has the buyer bought before? A surprising amount of issues originate from first-time buyers, particularly those concerning KYC.

Whilst the majority of these issues are minor and can eventually be rectified with the right paperwork, a change of control is cause for sufficient concern to any regulatory body, and – as seems to be the case with MaxEnt – unless rectified promptly, can rapidly escalate resulting in licence revocation, or worse, such as fines and penalties.

Thirdly, with regards to buyer structure, is the acquiring entity and/or ultimate beneficiaries fully known and disclosed? Have there ever been any legal (or worse) issues related to any of the founders, directors or major shareholders? Running checks on all known entities (especially through specialist agencies) should be mandatory. If these aspects are unknown or dubious at best, they will be flagged with any regulatory body.

Next, ensure you’re selling from a position of strength. This has been highlighted in previous articles; but is repeated here to underscore the need to run a full process to ensure buyers are effectively competing to win your business over; hence encouraging quality over quantity.

Finally – and this is important – don’t skimp on the quality of brokerage and legal entities, and conversely, ensure they are properly working for their money. Any advisory worth their salt (and reputation, which in such a closely-knit industry is the best currency) will not hesitate in turning down any buyer (even if they bid the highest offer in a process) that fails to meet the minimum regulatory and AML requirements.

Which also means – don’t work with intermediaries whose role is reduced to that of an introduction. Irrespective of their accolades, agencies need to work with the seller closely at all aspects of the sale, including the so-called post-sale process; an area often overlooked by brokers.

In such acquisition-intensive times, the need for buyer due-diligence is a matter that is frequently overlooked and, as was the case with MaxEnt, can sometimes have disastrous consequences.

Sellers need to be doing their homework even more than buyers, and should be relying on trusted entities to research, facilitate, manage and expedite the sale; whilst allowing the sellers to focus on doing what they do best; growing and running a successful business.

Julian Buhagiar is an investor, CEO & board director to multiple ventures in gaming, fintech & media markets. He has lead investments, M&As and exits to date in excess of $370m.