With many IFA business owners being in their late 50s or even early 60s, succession planning and business exits have arguably never been higher on the agenda.
Altus Consulting points to five main options:
- An outright sale, often for a multiple of three or four times recurring income, with a common deal structure being 50% upfront, 25% in year two and 25% in year three (dependent on how many clients have stayed with the firm);
- A partial sale where the owner stays on for two or three years to aid transition;
- A merger with a complementary business where values and approach are aligned;
- A sale to an employee ownership trust (EOT), an option which is rising in popularity;
- A transfer to the next generation, as is often the case with family-run firms.
“There’s plenty to think about and many external specialists who can help," says Altus director Simon Bussy. IFA owners interested in setting up an employee ownership trust may want to seek out Chris Budd, founder of the Eternal Business Consultancy, who himself sold his business, Ovation Finance, to an EOT, for example.
“For those where selling is the preferred route, the key action is to prepare the business; the time and effort spent on maximising value – both the income and brand – can make or break not just the valuation but the deal itself,” adds Simon.
1 Strong proposition
Firstly, think about your value proposition. What makes your firm special or different from other adviser firms out there? What is attractive about your business – is it the client base, the potential, the markets you focus on, your location, your distribution capacity?
“You need to market, not sell, yourself and the key to successful marketing is a strategy and knowing your target audience,” said Simon Goldthorpe, chairman of Beaufort Financial, a national partnership of IFA firms. “You should know the type of client you are able to advise; if you don't, how will you attract them?”
Simon at Altus suggests clearly segmenting your client base. “This is more than just a PROD requirement. Segmenting your clients, and maybe letting some go, enables you to offer different propositions and service levels to different segments.”
2 Good cultural fit
What type of firm do you want to sell to? What values must they demonstrate? Your reputation – with both clients and your team – rests on who you strike a deal with.
“The most important factor in ensuring a successful sale is having a good cultural fit – if you focus on financial planning, aim to find a firm that does the same when you begin your research,” says Alan Smith, chief executive of London-based Capital Asset Management. “The service model, investment philosophy and ability to really look after clients is important to most vendors.”
Cultural fit is the focus for Foster Denovo, which has completed two acquisitions this year – Orchard Wealth Cultivation and part of London & Capital’s UK wealth business.
Chief executive Roger Brosch says: “We are focused on the end clients and the relationship the advisers have with those clients and finding businesses who share our passion for client service. This ensures a smoother exit at maximum value.”
Do your own due diligence on each potential buyer – speak with other firms they have purchased. Are the owners, advisers and clients happy after the transaction has completed?
The choice is often between a consolidator (typically backed by private equity investors) or regional boutique firm. “Each has pros and cons so speak with each type to identify the best fit,” says Alan.
“Attend conferences and networking events – some of the best buyers are ‘off radar’ and don’t send mass emails. There is often great value to be found in conversations around coffee and lunch breaks.”
3 Desirable client bank
An attractive IFA business must have a repeatable client proposition which is profitable, according to Clive Waller, managing director of CWC Research.
“If the proposition is for high earning 45-55-year-olds building capital for retirement, it’s repeatable as there is a new cohort of 45-year-olds each year,” he says. “If, like many firms, you are looking after the same ageing group of baby boomers, now typically at or in retirement, the value to a buyer is far less because there is no source of future cashflow from new clients.”
If you specialise in advising clients of a particular profession (doctors or dentists, say), this might be attractive to buyers looking to broaden their client base.
4 High recurring income
Increasing the proportion of recurring income is critical to achieving a higher valuation, particularly given the possibility of a stock market correction. That would serve to reduce the value of clients’ portfolios and, therefore, the revenues of IFAs who charge a percentage of assets under management.
"After a 10-year bull market, valuations are at an all-time peak – any market correction over the next year or two will reduce business values, possibly significantly,” says Alan.
For Simon at Beaufort, the single most important thing in demonstrating the sustainability of income is showing that the seller is no longer essential to the business. “Effectively, they must write themselves out of the picture. A buyer will scrutinise how easy it will be to run the business without that main character.”
5 Well-rounded team
The clients should be clients of the firm not a “gun for hire adviser who moves around”, says Waller, and the firm should have all the specialists necessary to meet clients’ needs.
“Advice should be given by the most appropriate person at the lowest cost – a paraplanner may be more expert and much cheaper than a ‘rainmaker’ adviser,” he says. “The normal point of contact for the client should be a practice manager who will deal with a client issue or refer as appropriate – think of medical surgery.”
For Marc Barnes, a director of Cambridgeshire-based Timeline Wealth Management, the most attractive businesses can show that they care about clients, fellow advisers and support staff.
Managers and senior executives should be able to demonstrate that they can grow the business, cultivate professional introducers of new leads and recruit new advisers. “A track record in recruiting new advisers and hanging on to them is critical,” says Beaufort’s Simon.
6 Stable primary platform
The most profitable businesses have low acquisition costs, so little need for a buyer to recoup high initial expenses from ongoing fees. One way to keep costs low is to use fully integrated systems.
“In an ideal world, they would employ a single platform and practice management system that delivers their proposition superbly,” says Clive at CWC Research.
Having assets on platform creates efficiencies within firms, demonstrates that they are in control of their expenses and overall cost base, and can identify the clients that make them money – something many advisers were unable to do before platforms.
7 Efficient systems and controls
Is the technology you use optimised and working as hard as it should? Can paper and manual processes be automated? A good back office system combined with a stable platform creates a solid proposition.
“Choosing to go paperless in 2005 was one of the best decisions we made,” says Tom Munro, founder of Falkirk-based Tom Munro Financial Solutions, who is preparing to gradually transfer the company to his son Sean and possibly another younger planner.
“Plum Software enables us to file as we go, ensuring 100% accuracy on all chronologically stored client information. The system links seamlessly to the platforms we manage client assets on.
“Being fully automated with all software carefully aligned for dependability is one of the main attractions of a business like ours, as would-be acquirers have confirmed. This simple but effective approach would enable them to easily ‘plug-in’ to what is already in place.”
8 Compelling seller's pack
A clean compliance record and full, detailed client files ready for inspection are imperative. “Due diligence needs to be straightforward – you can't afford to miss an opportunity due to poor record-keeping,” says Marc.
Simon at Altus recommends putting together a seller’s pack or even a virtual data room with all the critical information in one place to make it as easy as possible for those you engage.
“Redact documents before you share, put in place non-disclosure agreements and think about data protection implications,” he adds.
Selling takes far longer than most people think. “Expect the process to last between 12 to 36 months,” says Alan at Capital. “The best time to start preparing is now – not in two or three years’ time.”
Interested in similar content? Read how this IFA helped a client achieve his final wish, or find more in our Have you talked about? section