Up to 70 per cent of adviser firm acquisitions fail to provide value to the buyer, delegates at Thesis Asset Management’s adviser conference were told.
Roderic Rennison, owner of Rennison Consulting, which provides consultancy services to intermediaries, fund managers and providers, told the conference those advisers looking to grow their firms through acquisitions could be losing out on value by failing to take account of what he called “basic checks and balances”.
Speaking at the conference, Mr Rennison said: “As profit margins at adviser firms come under more and more strain in the wake of Retail Distribution Review, advisers are looking for new ways to grow.
“Not surprisingly, buying a rival business can seem an attractive option for many, but this route is not without its risks. The truth is that most acquisitions are very complex and should not be entered into lightly.”
But Scott Gallacher, chartered financial planner at Rowley Turton Private Wealth Management, remarked the statistic was “surprising” and added he was sceptical.
“Generally we’ve taken the other view, i.e. that the acquisitions are not a good deal to the seller, or the clients,” he explained.
“The buyer typically attempts to reduce costs by switching the clients to a centralised investment proposition, sometimes charging them a 3 per cent initial fee for moving over, and also increases the ongoing advice charges. In one case I estimated the buyer recovered the entire purchase price directly from the clients within 12 months.”
Mr Gallacher continued: “Consequently I don’t think selling the business outright is the best option, although I can see the temptation of a large cheque.”
He suggested a better value option might be to effectively pass the business onto the next generation while retaining an interest in the business and receiving some of the ongoing profits by way of dividends.
A recent survey by Nucleus among more than 200 adviser firms which use the platform found of those thinking about long-term succession planning, 40 per cent would anticipate selling to another advisory firm, 30 per cent would expect to sell internally, to a family member or through a management buyout, 13 per cent to a consolidator, and less than 2 per cent to a provider.
In March, Nucleus published a guide to succession planning for adviser firms, called ‘Planning your exit: A guide to creating a succession plan and exit strategy’, co-authored by Rob Stevenson, director at Kingmakers.
He explained: “The decision around internal succession or external sale is an important one, but advisers may be able to keep their options open here. Once the sale process starts (particularly if it’s to an external buyer), advisers will want to have as much space and time as possible, as decisions come thick and fast and it can be exhausting.”
Mr Stevenson cautioned: “There are many ways to enhance enterprise value before and during the planning process and just as many ways to give value away by not structuring a deal properly. Success requires very careful planning.
“Finding the right fit is ultimately key to extracting the maximum value over the entire timeline of the transaction, while balancing the requirements of all the other stakeholders of the business.”
Mr Rennison issued a checklist of recommendations for prospective buyers, which included ensuring there is access to external advice where needed, avoiding taking short-cuts, making sure there is enough resource allocated and not being afraid to break off discussions and walk away if the deal criteria cannot be met.
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