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How to deal with legacy issues

This article is part of
Guide to selling your business

How to deal with legacy issues

Facing greater regulation and operating costs, more IFAs are choosing to sell their businesses in order to exit the industry.

As keen as consolidators are to buy up client banks, legacy issues (like risk-laden DB transfers, upheld complaints, and messy trail agreements) still risk derailing deals.

How can advisers get their houses in order when it comes to a sale?

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Proactively getting to grips with your business, and sooner rather than later, is the best strategy according to Mark Hughes, who sold his firm, Mark Hughes & Associates, to AFH in 2018.

“Whoever you sell to is going to want to know what they are buying,” says Mr Hughes, explaining that questions about the security of the firm’s income stream, and any potential liabilities, will immediately come up.

“You’ve got to start early on and that’s what my accountant told me some time beforehand, to get my business shipshape. You have to have a clearly defined proposition, even before you think about selling your business.”

This can include segmenting clients or even just focusing on a singular proposition and fee.

Even with a clearly defined proposition in his business, Mr Hughes says this spring-cleaning took four months.

“In that four months we tidied up and confirmed what we were selling,” he explains. “I had always said I had around 2,000 clients (categorised as individuals, couples or a business). When push came to shove, what we actually sold was around 850 clients.”

Mr Hughes explains that the balance were small clients paying token trail commissions - from a protection package sold on a mortgage arranged decades ago. After a few months’ hard work, he was able to sift through the client bank and now benefits from a cleaner book.

He adds: “It’s not a bad exercise for people who aren’t even thinking about selling their business.”

A question of culture

Julie Lord sold her business, Cavendish Financial Management, to Axa-owned Thinc (which later became Bluefin) in 2007.

Ms Lord, who has since launched Magenta Financial Planning, says her acquisition went smoothly as she designed her business to be as simple as possible.

“We didn’t have to deal with legacy issues because we had been working with one process for many years that focused on a singular client type, so everyone was dealt with in exactly the same way,” she explains.

“The important thing is to make sure your service level is the same across all clients or, if not, to ensure it is properly segmented. That way the transition is much easier.”

However well-run a business is, a mismatch between buyer and seller – in terms of ethos, values and processes – can mean legacy issues cause real problems.