Warren Buffet, CEO of multinational conglomerate company Berkshire Hathaway, is well known for his expertise when it comes to company sale and purchase. His mantra is “to prepare your company for sale on the very same day as you start it!”
Put simply, you cannot start to prepare early enough, just in the same way as you advise your clients.
So, given that you have spent your career building up your business, what should you consider when preparing to sell and how do you go about making your business attractive to an acquirer?
There are a number of factors that make a business attractive and also unattractive to a buyer, but the main questions you need to ask are: what is the acquiring business looking to achieve post sale and how easy is it going to be to get the purchased business into that position?
Firstly, buyers want to acquire existing profitability or the ability to generate additional profit by plugging in to existing infrastructure – sometimes both.
Low client numbers with high revenue production can be seen a positive. But it is also worth noting that if you had one client with £100m, they represent substantial concentration risk. If they choose to leave the business, the impact will be catastrophic.
This concept should also be applied to key advisers or revenue generators within the business. If one adviser is responsible for a high proportion of the revenue, this should be addressed to ensure they are motivated to ensure a sale is successful, particularly if this person is not a shareholder.
More clients are better than less, but only if each client is profitable
Servicing 1,000 low value clients is not going to be as attractive as 100 high value accounts to an acquirer, assuming the same cost to service. Striking a balance between value and ability to maintain the client work is something all sensible business owners have thought about, and every acquirer you meet will likely want to understand early on.
Where many acquirers are looking to generate additional profitability, they may ask the following questions in one way or another:
- Advice charge: Can we increase the ongoing servicing charge without losing clients?
- Platform: Do we own a platform; can we get the client assets there?
- Funds: Can we get funds into our internally managed portfolios?
- Redundancies: We have staff that do that job. Can we save on their payroll?
- Premises: Our offices are a few miles away; can clients go there instead?
- Change to advice process: Can we implement a telephone only advice process so we can see more clients – maybe even get rid of one of the employed advisers?
These should commonly be considered red flags to any potential seller as essentially the clients and staff are underwriting the cost of the transaction.
Once a business has been identified as having a suitable level of profitable clients, the focus of responsible acquirers should then be to identify the risk associated with buying that business, particularly when buying shares. Don't be offended when the acquirer asks to check your work; you wouldn’t buy a house without first looking inside.
Buying shares can be risky as the buyer is accepting any recourse that may arise because of advice given pre-sale. A squeaky clean, efficiently-run business with great processes and controls in place is attractive. Any advice that could be perceived as ‘high-risk’ should be well documented and presented early on in discussions.
Finding a buyer that defines risk in a similar way will also be beneficial to a smooth transaction
Many opportunities are derailed through advice risk that the buyer would not accept, and the seller did not deem ‘high risk’ enough to disclose early on in discussions.
PI run-off cover is a common way of acquirers addressing previous advice risk. As we know in this industry however, that is not necessarily adequate protection. DB transfer advice for example is being retrospectively excluded from some policies and clients will likely be able to claim compensation for bad past advice from the acquirer.
Age is also something to consider, both in terms of your clients and your advisers. High-value clients are good, but only if they’re sticking around. Appreciating the fact that most people accumulate wealth as they age, the concept of a younger client bank could be counterintuitive from a business owners’ point of view. From an acquirer’s position, an aged client bank, which is in the main experiencing decumulation through retirement, is not so attractive as fees generated are reducing year on year and you essentially have a depreciating asset.
Adviser age is equally important – if the buyer is not going to be bringing in an adviser to service the new clients, they must understand how long the current advisers plan to remain in the business. A business with a succession plan already in place demonstrates the sustainability of the profitability generated by the business.
Culture also plays a big part too
Even if the numbers stack up and the business appears to mirror the buyers from a risk-management perspective, both parties should seek to establish if this is a business they want to work with in terms of culture, standards, and approach to clients.
This is generally the biggest part of a due diligence exercise in my experience. An adviser business is a series of relationships with no tangible product to speak of. There is no machinery or inventory to value and if a client, member of staff or shareholder does not like what is happening, they can vote with their feet. Furthermore, if a transaction is going to detriment the acquiring business in some way, it is not worth it based on profitability alone.
In summary, acquirers want to buy a business that is profitable, sustainable and poses minimal risk to what they have already built. Don’t wait until the point where you want to sell to start looking at the buyers in the market; they are all different and you’ll want to understand each model in detail to identify what aspects of your business would be attractive, or what might need to change to give you the best chance of a successful transaction.