Faced with rising operational costs and regulatory pressures, the challenges of growing a financial advice firm are increasing. As a result, many business owners are now exploring their options for creating capital value.
Whether you’re looking for an imminent sale or a future planned event, finding the right deal can be a minefield, as in most cases you will likely have limited previous experience of selling a business.
It is imperative therefore that prior to talking to any potential buyers, you take the time to formalise a clear plan of what you are looking for in a potential buyer. It's much easier for a business owner to find the right deal if they know what deal structure they are looking for.
And while the right deal can mean different things to different people, there are certain elements of a successful deal that are consistent.
Put simply, the best deal is the most fruitful deal for all parties
The deal that provides the buyer with a successful, sustainable business, with potential for further growth; the deal that provides the seller with opportunities to optimise their capital value, tax efficiently, within their desired timelines; the deal that provides job security and further career prospects for staff and advisers; the deal that provides security and excellent outcomes for clients.
It's not uncommon for individual shareholders within a firm to have different aspirations to one another
This can be for a multitude of reasons, but most often this revolves around timelines, with age being a driving factor. The more complex the seller’s desired terms, the more difficult for a buyer to meet them. Therefore, sellers should be flexible with each other when creating their plan to ensure that their finalised desired terms are achievable.
Capital value, payment profile, earn out period, purchase type and other associated key terms are the ‘nuts and bolts’ of any transaction and if these terms cannot be agreed, then there is no deal to be done.
Another point to consider is that the right deal isn’t necessarily the deal that provides the highest capital value over the shortest period of time. Although these are vitally important aspects of any deal structure, these commercial elements only play a part of the overall transaction.
When looking to identify the right acquirer, culture, strength and experience all add long term security to both the business and its clients and increase the chances of a successful deal.
After all, the most valuable asset within any people-based business is the people
The relationship between advisers, staff and clients is the glue that holds a financial advice firm together and it's therefore imperative that these relationships are preserved.
Change equals risk in any acquisition and although change is unavoidable, too many people looking to sell focus on the commercial aspects of a deal structure, expecting the people within the business to simply ‘get on’ and ‘accept’ any changes which take place as part of the sale.
The ‘right deal’ though will enable anyone looking to sell to plan for the future, grow their firm and provide long-term stability for their clients and staff; ultimately allowing them to 'sell without selling out'.
There are reasons people choose to work for a certain firm and there are also reasons why clients decide to nominate that firm as their trusted adviser. If both parties are culturally aligned and there is a sense of continuity post sale, then this gives everyone the greatest chance of a transaction being successful.
Changing personnel within an acquired firm can add huge implications to any acquisition and in turn the customer experience. Clients and colleagues should always be the main priority to preserve both the legacy and valued client relationships.
Even retirement needs to be managed delicately, especially when it comes to advisers. A tangible, well planned out client handover with the new adviser endorsed by the exiting adviser provides the best chance of success.
When looking at cultural alignment between both buyer and seller, a key area to focus on is the advice itself. This includes considering:
- Who will be providing the advice?
- Will the client’s charges be affected?
- If a client previously received whole of market advice, will this continue?
- Will the client’s assets be moved to facilitate the acquisition, and how does this compare to the previous arrangement?
Vertical integration is common, especially with acquirers
Vertical integration can provide the buyer with more control, it can make the sales process easier and generates significantly higher levels of profits for the buyer.
There is a question mark however against whether vertical integration is in a client’s best interests. In most cases vertical integration costs the client more money, clients are typically 'shoehorned' into a limited range of solutions and very rarely do the new solutions exhibit any similarities to the solutions that the clients have been advised to use in the past.
When selling to an acquirer who is vertically integrated, the selling firm’s clients' experience will be altered significantly, but not necessarily to their benefit. Add to this the fact that the advisers and staff within the business will feel the changes hard and may not feel comfortable implementing changes that do not benefit the client, then this type of structure can add severe levels of risk to any acquisition.
In addition to ensuring that there is cultural alignment between both buyer and seller, sellers should also perform high-level due diligence on potential acquirers prior to entering any form of mature discussion stage.
Questions you should ask include:
- How profitable is the buyer?
- Does the acquiring firm have a target profile of firm that they are looking to acquire and if so, what is the profile?
- Who and where does any external investment within the firm come from?
- Does the firm provide advice in any areas categorised as high risk?
- How well is risk and PI managed, what does the firm’s complaints register look like, are there any exclusions on the PI policy?
- How many transactions have the buyers completed to date, and of those transactions, how many of the original advisers and staff are still with the business today?
- Of the firm’s acquired to date what is the total percentage of the capital value set at the date of acquisition that the sellers actually received during their earn out?
- Are there past sellers available to talk to about their acquisition experience?
There is no such thing as the perfect deal. To progress, both parties will have to walk towards each other. Sellers should not be enticed by the most attractive commercial offer before understanding what requirements that they must fulfil to receive all their expected capital. Are these requirements achievable and are the sellers in control of these requirements?
Finally, it is important to remember that nobody owns a client and no court in the land can tell a client that they must remain with or work with a certain financial advice firm. The main assets within a financial advice firm have legs! Finding the right deal that works for all parties involves putting in place all the necessary components to give the greatest chance of a solid pathway to a successful future sale.