Being bought by a trade acquirer versus a consolidator

Typically IFAs can be bought by consolidators or by smaller firms, but how does the process work under both?

Transaction stages 

 Giles Dunning, financial services mergers and acquisitions specialist and partner at law firm, Stephens Scown LLP, says: “Most transactions begin with informal discussions between the main principals, this can be instigated by an unsolicited offer from a larger acquirer.”

“If the talks lead to anything, the next stage will often be to agree non-legally binding heads of terms which may or may not involve professional advisers.”

Mr Dunning explains: “Following conclusion of heads of terms, the parties will usually move to legal and financial due diligence and draft a sale  purchase agreement produced by the buyer’s solicitors.”

According to him, the processes behind being purchased by either can take a number of weeks or months to be finalised and only then can the deal be finally concluded. 

Scott Gallacher, chartered financial planner at Rowley Turton says:  “Purchases are typically made in staged payments, normally with 50 per cent upfront and the remaining 50 per cent paid in one or two instalments after a year or two.”

He adds: “This reduces risk for the purchaser, as if the clients don’t remain with them the remaining 50 per cent might not be payable.

"However, it significantly increases the risks for the selling IFA and to some extent requires them to remain ‘involved’ helping transition the client to the new firm.”

Mr Dyer adds: "Sale to a consolidator brings several challenges for smaller sellers - usually everything changes.

"The biggest issue is undoubtedly the cultural change: more flexible working practices are usually replaced with a more rigid approach and advisers will have to get used to more formal processes, including greater oversight and more paperwork.”

Due diligence 

But according to Mr Dunning and experts there is a much higher scale of due diligence exercised by consolidators than small firms while purchasing an IFA. 

“Most consolidators will have a standard offer which changes little from one acquisition to another. A trade sale, on the other hand, is more likely to be a one-off offer which is tailored to the needs of both parties.”

 “Both processes will involve heads of terms, due diligence and a legally binding contract but there may be differences as to how consolidators will approach the process,” says Mr Dunning. 

Stuart Dyer, chairman of Soprano Consulting says: “The due diligence process may be a little quicker and more informal [when being bought by trade acquirers] although this varies case by case."

Consolidators are likely to have specialist due diligence and integration teams who may spend much of their time working with the seller throughout the process explains Mr Dunning. 

He adds: “Trade acquirers are less likely to have specialist teams and are more likely to rely on external professional advisers,” adds Mr Dunning. 

 Culture 

Being acquired by consolidators usually leads to a greater cultural change. 

Mr Dyer says: “This may not suit older advisers, who may decide to move on to a smaller firm.

"This in itself may cause issues for the principal of the seller - usually deferred consideration is linked to ongoing income streams and if advisers and clients defect, the seller may not get the entire purchase price.”

He adds that the reverse may be true if the sale is to a smaller buyer; cultures may be more aligned and transferring advisers may feel more at home. 

Mr Gallacher says: “A sale to another IFA firm continuing to advise in a similar manner to the existing IFA might appeal more from a cultural angle for the selling IFA and might be less distributive for the client, that is, less chance that they don’t stick with the purchasing firm.

This view is echoed by several others in the industry. 

But Mr Gallacher highlights that a key advantage of selling to consolidators is that “their entire business model is based on purchasing IFA firms so they should have deep pockets, an well-honed strategy and should be well versed with retaining ‘new’ clients”.

Mr Dyer believes that sellers should not automatically deviate to a consolidator or an individual firm and should assess the specifics of the situation. 

“We would emphasise that consolidators have learned a lot over the years and have developed acquisition and integration strategies that are appropriate for all sizes of target.”

“It is very much a case that a seller should look at a range of options and understand the broader implications of each option before pulling the trigger,” he adds. 

Mr Gallacher also highlights the issue of  “shoehorning” that can arise from consolidators. 

“In my experience consolidators tend to be tied or vertically integrated organisations running a common investment proposition approach. This can lead to the risk of your clients being ‘shoehorned’ into a new proposition.”

Mr Gallacher says: “Perhaps the biggest risk to the selling IFA in this scenario is that the client objects to the new proposition and this is an issue as IFA business sales naturally tend to be based on the client moving over to, and staying with, the new firm / proposition.”

 “We’ve certainly picked up a few clients where their original firm had sold out to a consolidator but the client preferred the traditional IFA approach,” adds Mr Gallacher. 

 saloni.sardana@ft.com