I was not surprised by the results of a recent survey of 1300 adviser firms in the UK which concluded that over 40 per cent of adviser firms are concerned that the remuneration they are receiving through their post-RDR pricing model for ongoing servicing of clients and may not cover their costs.
Over the next 12 months a window of opportunity exists for business owners who would like to use this fruitful time to gain the best value for their business. Any savvy businessman who has structured the business skilfully will be able to benefit from the entrepreneurs’ relief aspect of capital gains tax. Currently a business owner is only obliged to pay 10 per cent tax on sale of the business up to a value of £20m (if his or her spouse or partner is involved), meaning that if you sell your business for £20m pounds you only pay £2m in tax.
This is a very generous tax bracket as historically capital gains tax has touched 40 per cent and with UK elections due in 2015, any rise in CGT is not expected to spell trouble at the ballot box for the major political parities as the tax is perceived to apply only to a minority of the population. Post election, if the CGT were to rise to 40 per cent, a seller may have to sell his business for £30m to realise £18m, that is, the value of their business would have to have increased by 50 per cent.
At the same time, large companies have been generating cash and hoarding capital and with low returns on cash, investing in an earnings-enhancing acquisition has become the favoured option once more. There are large numbers of corporates with cash looking to acquire small to medium-sized businesses.
Benefits
Advising clients to sell their business this year or next is mutually beneficial to both parties. The reason this applies to financial advisers is that under the RDR it has become more difficult in earning commission, by advising clients to sell their business in 2013/2014, advisers are likely to grow the capital value in the business because clients are likely to invest more once they have liquid assets, therefore creating more funds under management for the adviser. This in return strengthens the core value of the business. Typically, an exiting business owner will put 33 per cent to 50 per cent with his or her trusted adviser.
Advisers have a strong database of clients that own successful businesses who at some point will consider selling. Advisers should strongly consider evaluating that database to discover the how they could yield more funds if clients did eventually sell their business. The most important thing is to approach clients with a very well prepared statement that should clearly address the benefits to the client. Advisers do a fantastic job of analysing a clients’ long-term cash flow and they are also in the best position to advise clients on the right timing to exit a business by taking advantage of a lenient tax option.
The current economic climate has posed a threat of survival to advisers as the RDR has affected clients more on a psychological shift in behaviour towards commissions. The transparency of commissions in an already well regulated industry has made clients test the DIY investing option. Financial advisers should now look at alternative revenue streams so they are less dependent on the commission business model – that is why capital gains matters.
A significant portion of funds under management can come from the proceeds of clients selling their businesses and on many such occasions the business sale will come about as a result of an introduction to a sales and acquisitions specialist.
From the clients’ perspective, business owners feel a trigger to sell when they stop doing the thing that persuaded them to set up in business and end up dealing with day-to-day management issues rather than the product or service. When a business owner realises that their day job now has nothing to do with what they set up the business for – they lose zest for the business. Advisers have access to many such clients and should not let them miss out on this chance to sell.
Business owners who delay selling will kick themselves when they look back on the low tax rates and available buyers – nobody wants to be slogging away for another five years, having missed this window of opportunity.
Business owners who have grown their businesses and can see that further growth could be more achievable in the hands of a bigger organisation, should take advantage of the low tax rates now (before they change) and the fact that big companies are buying innovative companies with their huge cash reserves. There has probably been no better time in history
The only advantage that the RDR has created for advisers is the consolidation of the industry from a macro level and since the RDR has been a knee-jerk reaction – it will take a long time to soften up. This is why advisers should begin exploring other revenue opportunities, one being evaluating which client businesses have a potential to be sold in the next 12 months.
From my own experience of being a serial entrepreneur, I cannot deny that having a financial adviser adds massive value to any business. Advisers fully understand how to make a return from clients’ investments and DIY investing will never be the way forward for any sensible business owner.
Clients need to understand that one area where advisers can add value is in long-term cash flow analysis. Advisers can help clients plan their spending as most business owners intuitively do not know if they have enough to continue leading the lifestyle to which they have become accustomed, with many continuing to work and to save their money rather than enjoying it with peace of mind.
By working with an adviser business owners can feel they have gained permission to spend their own money. Advisers should take the opportunity to talk to their clients about selling their business and the window of opportunity that’s opened up with CGT.
Mark Mills is chairman of Clarion Wealth
Key points
* Recent reforms to retail distribution have caused financial advisers to re-examine their business models.
* Advising clients to sell their business in 2013/2014 is mutually beneficial to both parties.
* The only advantage the RDR has created for advisers is the consolidation of the industry from a macro level
