Your IndustryAug 26 2020

Getting the right price

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IWP
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Supported by
IWP
Getting the right price

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.

Sellers should also produce a three-year growth and profitability plan for the company Andy Cristin, Pareto FD

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.” 

Red flags

An unfortunate feature of the financial advice space in recent years has been the question marks raised over the advice given on defined benefit (DB) pension transfers.

A high number of transfers can make it difficult for a buyer to assess the risk it is taking on James Hunter, IWP

“Not all pension transfers are the same, and acquirers will still consider firms with DB exposure where the rationale is well documented, a comprehensive process was followed, clients have been assessed as having the relevant knowledge and experience, and there is wider financial position to benefit from the flexibility this type of advice offers,” explains Ms Hicks.

However, James Hunter, chief financial officer at IWP, says a high number of transfers can make it difficult for a buyer to assess the risk it is taking on.

“Many firms have done some, but if a firm has done more than say 40 or 50, it becomes practically hard to assess them all,” he says.

Buyers will also be wary of clients having taken transfer advice and then “switching off” ongoing advice soon afterwards, given the lack of relationship but potential for negative consequences in future.

Scott Stevens, director of adviser acquisition and recruitment at Quilter, says it is not just DB transfers that can cause headaches: “The key risk a buyer is looking for here is around advice liability, quality of advice and provision of future complaints.”

IWP’s Mr Hunter adds that firms using self-employed advisers or appointed representatives are less attractive as “the economics are unattractive and client ownership may be ambiguous”. 

Another aspect that could make a business less attractive is the demographics of its client base.

Pareto’s Mr Cristin warns that future prospects for growth could be lower if the majority of clients are approaching retirement as it suggests a drop-off in recurring business.

Should I stay or should I go?

Another key factor for a selling owner to decide on is whether they stay with the company post-sale. Mr Cristin says this is a decision that needs to be made early on in the process.

“In a well-run business the owner should not be involved in the day-to-day running of the company,” he says. “There should be systems and procedures in place to ensure that the business can run without them.”

The owner or founder of a company often “sets the drumbeat for the team”, adds Mr Morrish, especially for smaller companies. This means that, if they stay even for a short period after the sale it projects “confidence and commitment for the next phase of the business”.

Quilter’s Mr Stevens says an owner or founder staying on post-sale can make a big difference to the success of the integration.

Even if it is only for a short period to manage the handover, it can help ensure a “positive and pain-free outcome for customers” and ensure as many clients stay with the company post-sale as possible.

Nick Reeve is a freelance journalist