The M&A market is now a minefield

There is so much merger and acquisitions activity in the broking community in the moment that we have started to recognise distinct characteristics.

There are the traditional hunters and farmers of course. The hunters spend a great deal of their time looking for businesses to buy. The farmers tend their client base and worry about an acquisition only if it drifts onto their land. Brokers need to be a bit of both. Spending effort trying to buy a business can seem far more exciting than starting work on a big renewal four months before the due date. But in the long run, which one adds more to the bottom line?

I may be wrong, but recently I have detected a couple of new species to add to hunters and farmers. They are poachers and rats. With some well known buyers in the market the price of good commercial books has started to creep up again. At one time you would be hard pushed to get one times commission even for good books of local SME business, but that is commonplace now - even cheap. But markets work the way markets work and, of late, we have seen examples of recruiting teams of people from other brokers rather than businesses and then paying a big bonus based on business that transfers from the former employer. Stealing the other guy's lunch can be cheaper than buying it from him. So that's the poachers.

What about restrictive covenants and restraint of trade I hear you ask? Well to begin with, not all brokers protect the goodwill in their business as well as they should. Some of them have employment contracts for quite senior executives that allow the employee to walk away taking the hard won clients with him or her. And when a business is bought or sold it sometimes happens that the buyer forgets that what he or she is buying is the expectation that clients will continue to trade with the business and not someone else. Restraints of trade in contracts are tricky things. Make them too weak and they will be ignored. Make them too tough and they may be thrown out by an industrial tribunal or a court. It is a matter of balance.

And this is where the rats come in. Recently a case was brought to my attention by a very angry broker, a Broker Network member who had bought a book of commercial business. The vendor decided that he wanted a little extra. Very appropriate since he is based in the home of the Building Society that uses that phrase. So after a year he recruited a couple of account executives who worked for the purchaser and set about raiding the clients he had previously sold. What about the restraint of trade you ask? Yes, there was a restraint in the contract and yes the vendor knows it. It said in plain terms that the "seller warrants...that neither it, its employees or successors will knowingly approach, compete or solicit and of the said clients comprised in the business and set out in the said schedule hereto..." and so on. The vendor's business is large and wealthy, the purchaser is smaller. The restraint of trade is unenforceable says the vendor. Or at least it is maybe enforceable, maybe not, and it will cost our man a lot of money with m'learned friends to find out.

Who knows how this one will play out. Our member has the choice of seeking an injunction or damages, but risks spending a lot of money if a court eventually throws out the restraint clause. Our member has counsel's opinion that the clause will stand up, but then barristers are one of the few professions that by definition are wrong half the time (think about it). In fact even if he wins all he will get is the lost profit on the cases that have been solicited successfully. He would get legal costs back of course but rarely is that a complete indemnity after costs have been `taxed'. Well he will make his decision.

But as for the other guy: signing a contract and then reneging on it because the other party cannot afford to risk enforcing it? Whatever happened to uberrimae fidei? Yes, add a rat to poachers farmers and hunters. Any other suggestions for the menagerie?

Grant Ellis is chief executive of The Broker Network