Your IndustryApr 16 2015

Steps to sell your business

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Steps to sell your business
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Selling your business can be a daunting process and understandably the actual search to find potential buyers interested in your firm can dominate your time and energy.

Initial preparation for a sale should not be underestimated in its importance, as considering the factors that are used in valuing your business can give you a clearer idea of how it will be evaluated by the acquiring firm.

The large majority of businesses are still sold for a multiple of recurring income and some advisers may be concerned about the switch-off of trail commission for platform and corporate pension business in April 2016, which will come into force as a result of the Sunset Clause. Experts suggest that, for some, less than half of their recurring revenue comes from fee-paying clients.

Understandably, there has been concern that a reduction in recurring income will affect the value of a firm when it is to be sold, as it is the dominant metric used in the sale valuation. Also, this concern is in light of the fact that the multiple can usually be enhanced through an effort to maximise recurring income.

However, businesses are not valued on recurring income alone and many pieces of information will be gathered together as part of the buyer’s due diligence process into your firm. The worth of your business will be judged upon the evidence you can show the buyer rather than the impression you give of its worth. The necessity for accurate record-keeping should not be overlooked and so you must ensure account information, projections and synopsis of clients are all clear and up to date.

Initial information you might expect the buyer to want to see, not in detail at this stage if a confidentiality agreement has not been signed yet, includes:

• Fee base retained after three years

• Number of existing clients

• Cost of fee base per calculations

• The percentage of your fee increases implemented over three years

• Additional services provided to these clients annually

• New clients referred over three years and client retention

• Regulatory history

• Total gross revenues of the firm after three years

• Net cost per £1 revenue based on cost of fee base

Clearly the focus here is on the quality of the client pool and insight into the value of your fee base. Ongoing client charges is one factor that will influence the valuation of your business. For example, pointing out that your fee is 0.5 per cent, planting the idea of the scope for a hike to the buyer themselves and explaining how recurring income could be doubled by an increase in the client charge to 1 per cent. Such a projection could be shown to be included in a valuation.

The quality of client relationships is another way your business will be valued in a sale process. As a result of the shift to a fee-based world, we have seen that some businesses have targeted higher net- worth clients to increase the value of their client bank and consequently the multiple for which they can sell their business for. This is where client segmentation data becomes important, as going beyond basic client information will help you show the percentage of clients that fit into the higher net-worth bracket for example.

Few advisers have a sophisticated data management model and so having the ability to show client- segmentation data would also give you a competitive advantage over other firms. Either way, for those businesses looking to sell, a data audit would be a useful task, especially if any changes are afoot such as moving non-advised clients into an advised proposition.

Some examples of information on clients used in the valuation of an adviser business is the average age, how long they have been with the firm, any increases in services/ fees, average portfolio and whether they are active. This last metric is about when the client has last seen you for advice. All this information together will give the buyer a clearer indication of the quality of your client base, as for example a client with a larger portfolio, who has increased their service use or been in contact recently is of a higher value than a client with the opposite characteristics.

It should also be remembered that the structure of a deal will also affect the price a business is sold for. Experts have found that, if a seller wants to remain active in the business following the acquisition, this tends to affect the multiple on the downside. If you are selling your client bank, then this will likely push the multiple up. If the acquiring firm is taking on some strong staff expertise as part of the acquisition, then it will push the multiple up.

The importance of data collection is apparent again in the onus upon the seller to show the strength of this staff expertise. The buyer will expect to see a breakdown of any staff salaries, remuneration, skills, career paths and logs of chargeable hours for staff with hourly charge out rates. The buyer’s reasons behind making an acquisition will also affect how the company is valued. For example, if they are looking to gain a particular regional foothold, data around geographical representation of clients will be useful to show the buyer.

The way a business is paid for - upfront or as a staggered payment- can also impact the sales multiple. Most deals are structured as a staggered payment and so it is necessary to consider what your business will look like over the payment period, as this is usually linked to recurring income. So for example, if a deal was made with additional payments on the second and third annual anniversary, a drop in recurring income is the likely metric behind these future payments. The third payment is likely to be in 2016 when the sunset clause has been enforced and legacy commission reduced.

However, other metrics can be used when doing a valuation, which may be more representative of value than recurring income, such as funds under management, which is sometimes used for larger firms and where the average sale price tends to be around 1.8 per cent of FUM, or an EBITDA- based valuation. We do not see a move to focus on this profitability-based valuation, as of yet anyway. Perhaps this is because profit margins will be different between firms with each firm managed differently. However, if you believe recurring income to be underestimating the value of your business, there is nothing stopping you showing an alternative method of valuation.

You must remember that your business is worth what a buyer will pay for it and so it is your prerogative to show the acquiring firm clean and accurate records that can help them make that evaluation. Getting a premium price may not be easy, but half of the battle is in preparation for the sale itself, to make sure that when you do sell, it is for the best price possible.

Steve Hagues is founder of Retiring IFA

Key Points

Initial preparation for a sale of one’s business should not be underestimated in its importance

The focus here is on the quality of the client pool and insight into the value of your fee base

The structure of a deal will also affect the price a business is sold for