Different business models will be attractive to different acquirers, so advisers must research the market and understand what consolidators are offering. The best way to do this is to speak to potential purchasers directly and simply ask what they want from an advisory firm.
IFA consolidators will invariably be happy to have informal and confidential discussions with you, experts spoken to by FTAdviser agree.
Simon Chamberlain, chief executive of Succession Group, says what he finds appealing about a business is generic, replicable processes that all advisers in the firm follow. He says he likes to see a generic investment process and a clean compliance record when looking at a firm.
Dominic Rose, acquisitions director of Bellpenny, says firms should have a clear business model with documented client service propositions. He says an adviser should also have a clearly defined investment proposition.
Mr Rose says: “Steer clear of anything esoteric and high risk if you want to appeal to the majority of consolidators. IFA businesses are relationship businesses and the transfer of that relationship to the consolidator is the key consideration.
“Make sure that client ‘ownership’ is clear and that there are appropriate restrictive covenants in place to ensure that the asset being acquired the clients can be transferred with minimal risk of the clients being poached by a former member of staff.”
This latter is a point that has dogged a number of acquisitions in recent years, most notably in the court case that saw Towry take former Edward Jones advisers to court in 2010, an action it eventually lost in 2012.
Acquirers will be keen to see non-solicitation clauses in agreements with any advisers that are employees of the business. Some would prefer the more extensive non-dealing clauses, though these can be controversial and difficult to enforce as they limit the client’s freedom to choose.
There should also be clear opportunities for the consolidator in order to make it most attractive, Mr Rose adds.
The opportunity may not just be revenue or cost related but it may be for the consolidator to bring in intellectual property and enhance their own offering by incorporating something you do within their own model.
Ultimately though, there is no point in your business being wonderful if the fantastic nature of it is hidden under a bushel.
The availability of high quality management information is absolutely key to attracting a buyer and Mr Rose says this should cover the clients, their policies and their charges in as much detail as possible.
The thing to remember is the more attractive you can make your firm ultimately the more you may be able to get for it.
In terms of what amount you can expect to receive for your business, Succession’s Mr Chamberlain says typically firms receive a multiple of recurring income.
Increasingly, Mr Chamberlain says firms may also receive multiple of earnings before interest, taxes, depreciation, and amortisation, effectively operating earnings. Bellpenny’s Mr Rose says multiples of profit tends to be on larger transactions.