Sam Mabon, partner at independent legal practice Brabners, says: “Sellers commonly find themselves stuck between achieving maximum value and getting the best deal for clients and employees alike. This often results in sellers defaulting to the easier option of a management buyout to the next generation of advisers. While this is appropriate in some cases, it doesn’t always result in the best return. It can also breed resentment if shares are retained by the outgoing adviser.”
One IFA business recently plumped for a slightly different route. Chris Budd, founder of Ovation Finance, is selling the business to its staff via an employee ownership trust (EOT) – a structure only introduced in 2014. Company profits belong to the trust, and are used to pay off a deferred consideration to the original shareholder over time. Once this has been paid, existing employees can then start enjoying the profits themselves.
“It’s a great idea, but you’ve got to have the staff and the infrastructure to do it,” says Mr Trotman, who suggests that smaller businesses or those with older staff may find the option unfeasible.
On the other hand, the relatively low profile of EOTs and their accompanying tax breaks – payments received by the owner and part of those received by the employees are free from capital gains tax – means their popularity may yet become more widespread.
For those with younger employees, passing the business down is an option, as Helen Ball, group operations director at Tenet Group, explains: “Small adviser firms can often be family businesses, with a son or daughter in line to take over the reins, or firms may bring in an adviser with a view to them taking over the business within a period of time.
“Sometimes the principal stays within the business as chairman and takes a salary, with a new adviser assuming the role of principal,” she adds.
As mentioned, one of the obvious challenges for firms is securing the right sale price. Traditionally, as with the sale of any business, this would be calculated as a multiple of recurring revenue – usually three times this figure.
But there are other factors, too. “Particularly acquisitive buyers will even go beyond this [multiple] for businesses with attractive attributes, such as experienced and committed employees or a loyal client base,” explains Mr Mabon.
