From Special Report:
Selling Your Business - September 2012
Selling your business: Consider your exit strategy
Vendors who opt not to sell their firms wholesale, will need to consider carefully which parts to cast off
The IFA mergers and acquisitions market is a busy place at the best of times, but the impending retail distribution review deadline has added an extra element of eventfulness to proceedings.
The vast majority of firms may well be happy to keep calm and carry on, but there is a dissonant band that is unwilling to march into the brave new world and is interpreting the January deadline as an eviction notice rather than the opportunity that most view it as. Of these departees, many will be in advanced negotiations regarding the sale of their business. Those that have not already entered into talks and who do not have the necessary permissions to operate post-January 2013 are leaving it very late indeed and may be compromising the price they are able to realise for their businesses.
Those who have been working on their exit strategy – and this includes those in no desperate hurry to leave the market before January – are likely to have already realised they are essentially faced with two options regarding the sale of their firm. The most obvious is to engage with a national or regional broker group to get the ball rolling. Such organisations will be well versed in the processes behind acquisitions and can steer the vendor through the various stages, although it is important that the selling party is well prepared before any initial meetings. The second option is to offload one’s business directly without the need for a third party who will obviously be taking a cut of the deal. This can be done by speaking with similar firms locally or organisations that vendors may have established relationships with previously to see if they might be interested in an acquisition. There is no harm in advisers looking to sell up giving both routes a try to both get an idea of demand and what kind of price is achievable. Vendors can also keep an eye on the trade press to get an idea of where demand is coming from and through networking at professional events may be able to gauge interest.
Despite the buzz of buying and selling activity, vending advisers may have to think about exactly how they present their business for sale and which parts of it they choose to part with. Offloading the firm lock, stock and barrel may be the preferred option, but, for various reasons, this may not be achievable. One method of sale which seems to be increasing in popularity is selling just the client bank and leaving the rest of the company intact. Whether this is being driven by buyer demand or conscious decisions on behalf of vendors is open to conjecture, but we are witnessing more of this type of sale than used to be the case. Offloading one’s client bank is not simply a case of selling one’s contacts book of course, but an agreement to sell the assets, ongoing revenue and costs associated with the business while unfortunately keeping hold of the liability. This can be negated by the implementation of professional indemnity run-off cover, but still leaves the vendor with a certain amount of responsibility they would not be laden with if they sold the company wholesale. There are also differences in tax procedures between the various methods of disposing with a company, with certain vendors qualifying for breaks such as entrepreneurs’ relief.
Some individuals may wish to sell certain parts of their business because they are no longer profitable or relevant to the company’s core strategy. While one person’s trash could well turn out to be another’s treasure, it is worth being realistic about the price one expects to achieve in such sales if they are not going to be lucrative or useful. Any vendors that are looking to pare down their operations in order to take the company in a different direction will have to bear in mind that any acquirer is likely to insist on restrictive covenants whereby the company is no longer allowed to operate under the same trading name or in the same sort of areas. Although solely selling the client bank implies that future activity is possible, once the revenue-generating part of the business is withdrawn you are effectively left with a shell company.
As mentioned above the acquisition market is somewhat skewed at the minute by the proliferation of firms looking to sell up before the end of the year. While vendors with time on their hands would do well to avoid selling before the deadline so they are not regarded in the same boat as the fire sellers, there is also a counter argument that buyers are primed to acquire at present and that their appetite may diminish in the short-term once January has been and gone. To determine how much this is the case in their own local market, time-rich vendors should make initial enquiries as to the price they could achieve for their firm in the current climate and hold fire until this time next year if the findings are not to their liking.
No matter when adviser firms looking for an out choose to sell, there are certain principles that remain unchanged. The most important of these is that vendors know their numbers and their businesses inside out so they can field any inquiries and allay any concerns that interested buyers may have. It sounds so simple, yet there are still so many vendors who do not have these figures to hand when asked. Given that acquirers are likely to have a relationship with the vendor for the short-term, while the handover is completed, such unprofessionalism at the start does not exactly get things off on the right foot. Do your homework, prepare the figures and potentially interested parties are likely to form a better opinion of you and your organisation.
Another essential element of the selling process is that vendors be flexible and open-minded. This instruction refers not simply to the end price that is agreed on, but also considerations like what parts of the business are to change hands if it is a partial or client bank sale, or how long the handover process will be if the seller is to remain in the business for a time. Both parties will have their preferred set of circumstances, but it is important to be willing to negotiate if a sale is to be achieved. This is especially important in a market such as at present where buyers are inundated with opportunities. Stick to your guns too much and potential acquirers will be more than happy to continue their search elsewhere.
One last piece of advice that I always give to vendors is to make sure their backoffice is in good order. It is something that can easily fall by the wayside during busier periods, but the more organised and straightforward things are behind the scenes, the better the company is likely to operate front of house and the more attractive it is likely to be to acquirers. It is imperative that vendors take advantage of any quiet business periods to ensure their backoffice is in as good a condition as possible.
David Hesketh is Group M&A manager of Perspective Financial Group