You have probably never been gated…..it means to be kept somewhere you don’t want to be and not allowed out.

Unfortunately there are a number of “buyers” out there at the moment which aren’t actually buyers and where you could get your firm with its assets gated.

They are not buyers because to be a real buyer you have to have the money to buy the thing you want to buy.

Instead, of paying you for your business asset you actually have to give a piece of your business away typically 5-15% to this type of buyer (for nothing)

In return for giving them some of your business they will usually come in and put some of their systems and processes in place. More about these later.

Their carrot for you doing this is typically that at some point in the future the whole business (including yours) will sell for over 10 times earnings.

Usually, if this doesn’t happen then typically they claim you are guaranteed a 4-8 times trail or profit multiple.

Do not fall for this type of nonsense…

Firstly, the idea of a recently consolidated advisory firm selling for 10 times earnings or more is less than certain or at least has never been achieved, ever.

Secondly, when the mothership fails and you seek to pursue your fall back positions then where will the money come from or will the whole thing just implode?

Thirdly, you know those systems and processes which will increase the value of your firm? Well, you should consider that the more effective they are then the more expensive your business is to them.  So they want you to do well but not that well?

Finally, the legal side of these type of arrangements are a complete minefield as regards potential disputes and are very one sided meaning in the purchasers favour. You will need a very expensive lawyer and even then, possession is nine tenths of the law.

It’s not that this type of arrangement can never work but you should always check out the insolvency history of the people running the show.

Remember that no matter how hard you try, it’s impossible to do a good deal with a bad guy.

Where is the list of previous purchases made? Why can’t you speak to that one? How many times has the firm been to court? Is that the way they deal with things? Will they share the actual cash flow for the past few months so you can see how stable it really is?

If you need to talk through these types of options and the pitfalls of individual options then get in touch but our best advice is to get paid for your firm, that’s what should happen when you sell something to a real buyer.

Don’t get gated, if you are already gated then here is a cautious word for you… get out whilst you still can.