Wealth Manager Avoids Solicitation Claims in M&A Case

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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

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