There are many things that need to be decided and ironed out when an adviser sells their business. One of the most crucial, needless to say, is the price being paid.
Clients might value what an adviser does, but how can the latter ensure that is reflected in the offer received from an acquirer?
It is important at the start to get a realistic idea of what the business is worth. This can be difficult, as different acquirers have different methodologies for assessing value.
Andy Cristin, a consultant financial director at Pareto FD, says the “traditional” method is based on a multiple of annual revenues, but others might use multiples of annual profits or earnings before interest, tax, depreciation and amortisation.
Victoria Hicks, acquisitions director at The City & Capital Group, says an increasing number of deals are being structured to pay out over several years based on recurrent income and a fee split.
“This strategy is more common where smaller firms are purchasing other local firms or client banks, and would prefer to manage a purchase through income received, rather than raising a large deposit,” she says.
Succession Wealth has been an active acquirer in recent years, most recently buying Investors Planning Associates in October 2019.
Paul Morrish, corporate director at Succession Wealth, says that whatever the metric used, the best deals will involve companies with “proven profitability, good underlying and ongoing growth, strong client and staff retention, a clear client proposition, and an excellent risk and compliance record”.
Improving your chances
There are several things sellers can do to increase the attractiveness of their business.
Recurring business is a positive, as is diversification of clients and staff. Making sure all processes are clearly documented and any intellectual property is protected are also crucial factors in safeguarding the value of a business.
Sellers should also produce a three-year growth and profitability plan for the company, Mr Cristin says.
“This would need to be based on realistic assumptions and perhaps resources that the seller does not have access to,” he adds.
Ms Hicks says her firm encourages advisers to “look at their business through the eyes of an acquirer”. Some buyers’ due diligence processes can include upwards of 150 different items, so working through these in advance of any discussions can help “maximise your position in the market”.
Succession’s Mr Morrish adds that any sales process should not be treated simply as a “beauty parade” for potential buyers. Any company that has been “dressed up” for a quick sale “will soon be uncovered”, he warns.
“Just showing off the attractive bits misses that it is people and the enduring quality of relationships that really matter,” he says.
“[Areas to address include] client and staff relationships, the relationship between the potential buyer and the seller, and demonstrating that these are not just for the moment of a sale, but both historic and also embedded for the future.”