Why Compliance Is Shaping UK Prize Draw M&A

Compliance risk is increasingly becoming a consideration in UK prize draw transactions, with questions around governance, controls and supporting evidence potentially affecting due diligence, contractual terms and valuations.

For buyers, uncertainty surrounding a target company’s compliance history can result in additional scrutiny during the transaction. Where issues cannot be resolved before completion, the remaining risk may ultimately influence the terms of the deal or the price a buyer is prepared to pay.

Fast-growing businesses can also accumulate what might be described as “compliance debt”. Controls may operate effectively in practice while the documentation, evidence and governance supporting them fail to develop at the same pace.

This becomes more significant when a business faces external scrutiny and is required to demonstrate not only that controls exist, but that they have operated consistently over time.

How Compliance Debt Affects Prize Draw Due Diligence

Technology businesses have long used the concept of technical debt, where decisions that enable short-term progress create work that needs to be addressed later.

Compliance debt can develop in a similar way when documentation or governance fails to keep pace with a growing business.

During due diligence, demonstrating that a control exists is only part of the process. Buyers may also want evidence showing how that control has operated historically.

Gaps in those records can make it more difficult to establish the compliance history of a business and introduce additional uncertainty into a transaction.

A weakness identified before a sale can often be corrected. However, establishing what happened before the issue was addressed, and providing evidence covering that period, can prove more challenging.

Where sufficient evidence is available, an issue may be resolved before completion. Remaining risks can instead be addressed through contractual protections or reflected in the valuation.

How ZEAL Addressed VAT Risk In SevenCanyon Acquisition

ZEAL Network’s acquisition of SevenCanyon provides an example of how regulatory uncertainty can be addressed during a transaction.

The deal came while HMRC maintained its position that paid entries into prize draws offering a free-entry route are subject to VAT at the standard 20% rate. A major operator is reported to have challenged that position before the First-tier Tribunal, with a decision awaited

ZEAL said historic VAT risks had been covered through insurance, while the potential impact of future changes was also considered as part of the valuation of the business.

The example demonstrates how unresolved compliance or tax questions do not necessarily prevent a transaction, but can influence how risks are allocated between the parties.

Demonstrable Compliance Beyond The Voluntary Code

By late July, around 195 operators had signed the Government’s Voluntary Code of Good Practice.

Rokker estimates that more than 1,000 operators are active in the UK market, meaning the number of signatories represents less than 20% of that estimate.

Appearing on the signatory list demonstrates participation in the Code, but due diligence may require a deeper assessment of how an operator’s controls function in practice.

The Voluntary Code can provide a benchmark for this process. Some businesses may already operate in accordance with its standards without appearing on the signatory list, making supporting evidence particularly important when facing external scrutiny.

Preparing For Due Diligence Before A Prize Draw Transaction

Compliance evidence can be assessed before a potential buyer begins examining a business.

An independent review can identify gaps while there is still time to investigate their cause and address them. It can also highlight controls that operate effectively but are not supported by sufficient documentation or historical evidence.

eGaming Integrity’s Voluntary Code Advisory and Audit framework applies this approach to prize draw businesses, assessing existing practices against the Code and examining what can be demonstrated under scrutiny.

Identifying weaknesses before a transaction gives operators an opportunity to address them before the same questions are raised during due diligence.

For prize draw businesses considering investment, acquisition or a future sale, the ability to demonstrate compliance over time can therefore become relevant not only to regulatory risk, but to the structure and value of the transaction itself.