Accreditation risk on a change of control

Certification is permission, not property

The parent sector page names this as the single biggest sector-specific risk in a fire and security purchase. It is worth understanding why, because the reason is structural rather than bureaucratic.

Third party certification is granted to an organisation, against assessed processes, named competent people, records and premises, by a certification body operating a published scheme. It is not an asset the company owns and can sell. It is a continuing judgement about a specific business, made by somebody else, and a change of ownership is precisely the event that puts that judgement back on the table.

What makes it commercially serious is what hangs off it. Insurers require it before they will accept a system. Police and fire service response eligibility depends on it. Tender documents and framework agreements specify it. Customer contracts frequently oblige the company to maintain it. Lose it, and a business can be trading lawfully and still be unable to keep most of its work.

Two ways it goes wrong

The certificate is put back into assessment. Scheme rules generally require a certified organisation to notify significant changes, which includes changes of ownership, control or key personnel. Depending on the scheme and the change, that can mean anything from a note on file to a reassessment visit to, in the worst case, a fresh application. Time is the cost, and time is exactly what an acquisition does not have spare.

The competent person leaves. Most schemes depend on named individuals: a technical manager, a qualified supervisor, a responsible person. If that individual is the seller, or is a long-serving employee who retires at completion, the certification's foundation walks out with them. A company can hold a valid certificate on Friday and be unable to satisfy the scheme on Monday without having changed anything else.

Why this decides share purchase or asset purchase

In an asset purchase the buyer takes assets and contracts into a different legal entity. Certification does not travel with them, because it was granted to the seller's company and not to the assets. The buying entity has to be certified in its own right, and unless it already is, there is a gap.

In a share purchase the certified entity continues to exist, and the change is one of ownership rather than of legal person. That is usually a notification and a review rather than a fresh application, which is a materially easier path.

This is one of the few situations where the structure with more inherited risk is the right one. Buyers are frequently told, correctly in general, that an asset purchase leaves the past behind. In this sector that advantage can be outweighed by the practical impossibility of trading without the certificate. See share purchase versus asset purchase, which sets out the wider trade-off.

How to establish the position during diligence

This is checkable, and checking it takes days rather than weeks if it is started early.

1. Get every certificate, in full, with the scope statement and the expiry or next assessment date. Scope matters: a certificate covering intruder alarms does not cover fire detection.
2. Identify the certification body and the scheme, and obtain the current scheme rules on change of ownership and change of key personnel.
3. Identify every named individual the certification relies on, and establish their intentions honestly rather than optimistically.
4. Write to the certification body, with the seller, describing the proposed transaction and asking what it would require. Ask for the answer in writing.
5. Check the assessment calendar. A scheduled surveillance visit falling in the first weeks after completion, when the business is at its most disrupted, is worth knowing about in advance.
6. Read the largest customer contracts for clauses requiring the accreditation to be maintained, and for the termination rights that attach to losing it.

Do the same for vetting and screening. Security work often requires staff screened to a recognised standard, and an engineer base that cannot be screened to the level the contracts require is a set of contracts that cannot be kept.

What belongs in the agreement

Once the position is known, it gets dealt with in the documents rather than hoped about:

• A condition precedent where the certification body's position needs to be confirmed before completion.
• Warranties that the certificates are valid, in scope, not subject to any outstanding non-conformity, and that no notification obligation has been missed.
• An indemnity for loss or suspension arising from anything that happened before completion.
• Retention of the money against the accreditation surviving a stated period, which is the mechanism that makes the warranty worth something. See deferred consideration and earn-outs.
• A tie-in for the named competent person, whether that is a period of continued employment, a consultancy through the handover, or a commitment to train and register a replacement before completion.

What it does to the funding

A lender that knows the sector will ask about this before it asks about much else, because it is one of the few risks in a services acquisition that can stop revenue immediately rather than gradually.

Expect it to appear as a condition of drawdown, with evidence of the certification body's position required before money moves. Expect a view on the named individuals, and possibly a requirement that a key person stays for a defined period. Where the position cannot be confirmed in advance, expect either a smaller facility or a retained element until it is.

The reverse is also true and worth saying. A buyer who already holds the same accreditations, in an entity already assessed under the same scheme, has removed the risk entirely, and that is a genuine reason for a lender to prefer that buyer. It is one of the clearest examples in these sectors of why a bolt-on is easier to fund than a first acquisition. See bolt-on acquisitions.

Where we fit

None of the above is finance, and none of it is something a lender will resolve. It is work for the buyer, the certification body and the solicitors, and it is much cheaper done before exchange than after.

What we add is the funding side. A generalist funder often does not know to ask this question at all, and a buyer who raises it themselves can find they have introduced a doubt nobody knows how to price. We know this market and we know specific people who have funded fire and security acquisitions before and have seen the accreditation question dealt with properly. Tell us which schemes are held and how the deal is structured, and we come back to you with who can fund it and what they will want to see. See also monitoring contracts and recurring income.

We introduce buyers who are acquiring through a limited company or a NewCo. If you are buying personally, as a sole trader or as a partnership, we will point you to an authorised firm directly instead.