In her third and final article in the series, Louise Jeffreys, Managing Director, Gunner & Co investigates what you need to know today to make the right decisions for tomorrow.
In my articles over the past two months, I’ve tried to help those advisers looking to sell their businesses to better understand and implement different sustainable growth strategies. This is essential to any business and will have a dramatic effect on your eventual exit plans in the future. I also looked at the more practical points of preparing your business for a merger or acquisition. This included a number of sound action points on how to maximise the value you have already built up in your business. This month we’ll take a look at how you can realise that value, and what the different options might look like.
Often when I ask advisers what they are looking for upon exit the answer I get is “I don’t know”. This makes sense of course when you don’t know what options might exist. So let’s explore them here.
What are the different options?
- Partnership models
When talking about partnership models, I am referring to large scale advisory businesses that bring on smaller advisory firms, not individuals entering a business partnership.
Partnership models are typically most appropriate for those advisers who are looking to work on for some time, but have a clear plan for the final exit, and potentially be looking for support in terms of compliance, marketing, administration etc. By entering a partnership model you are de-risking your exit plan, because you have a clear idea of who will be buying your business eventually, be that the partner themselves, or another business within the partnership.
Most partnership models offer a number of similar features, such as new business and marketing support, client newsletters, back office management, compliance support and training and development facilities. What tends to differ is the financial approach. Some may include a small capital event upfront with a clear timeframe to a full buy-out, where others have no initial capital event, and leave it up to you (within reason) as to when you wish to leave and complete the sale.
In my opinion, the big advantage of partnerships is that by delegating significant amounts of administration, and with new business support, you have more time to work on retaining your client relationships and building new ones too. This can also typically result in growing your funds under management thereby increasing the value of the business. It also makes the final exit much simpler, with little to no need for due diligence, and a clear understanding from both parties of the desired outcome.
A sticking point with this approach can be the potential need to follow a different investment approach. However most partnerships invest significantly in investment research and provide sound portfolio management options to meet clients’ different needs. The good news is that typically you can keep your brand and business operations as they are today, so the level of disruption to your clients is minimal.
- Advocacy Models
Writing in an article for FT Adviser recently, Kevin O’Donnell picked up on the so-called advocacy model of acquisition as a refreshing approach. He said “I like this approach, not just because it is worthwhile financially, but because it also recognises the value of the long-standing and personal relationships between advisers and their clients, a factor often overlooked in the stampede to acquire assets under management”
Advocacy models generally suit single-adviser businesses best. Essentially the adviser sells his business and de-authorises, but continues as an ‘advocate’, maintaining a relationship with key clients, in return for a proportion of recurring income. If your client suggest they are looking to make new investments, you would refer them to the business you sold to, and as your clients FUM grow, so too does your ongoing income.
There are many benefits to this approach. It recognises that you have built long-lasting relationships with your clients, and don’t necessarily want to just walk away from them, it also de-risks any loss of clients, which in a classic acquisition agreement devalues your capital payments. And often, you can choose to continue that face to face contact with only certain clients, and hand over others entirely to the buying business. Furthermore, if the FUM of your clients’ grow, whether it be through your introductions or reviews with their advisers, so your recurring income grows.
The draw back perceived by some of this approach is that there isn’t a lump sum payment, although when you do the maths, typically assuming your funds remain at a similar value as when you ‘sell’, you will be better off – with the trade-off that payment is made over a significantly longer than average period. And if through your introductions and the business IFA’s efforts the funds grow, so too does your reward.
- Classic Acquisition
Whilst perhaps the first option most people think of when planning an exit, there is no such thing as a ‘typical’ acquisition. Buyers, like deals, come in all shapes and sizes, and what’s right for one seller may not make sense to another.
I think it can help to think of buyers in different categories, as there can be some similar veins when you approach it this way.
Large nationals and consolidators
The large nationals and consolidators dominate the press with their acquisition activity, since a strong driver of their growth activity is through acquisition. If you look at a business like Bellpenny, their entire strategy from conception has been to build by acquisition.
The great things about these firms is their experience in acquisitions – they have been through the process so often you don’t need to worry about some common pitfalls, which can save you valuable time. They also have a track record for making staged payments (‘most’ purchases are made with 3 payments over about 24 months), alleviating concerns you may have of receiving your money.
Since their acquisition strategy is so well-defined, it can mean you will find a less flexible approach to negotiating, and there will be certain things that are set in stone. Also, if you plan to work on it is likely you will be expected to fit their ways of working, which is something you need to be sure you can adapt to.
Mid-size regional acquirers
There are a number of mid-size businesses which again have acquisitions as a key element of their growth strategy, although with clear geographic boundaries. This allows them to grow in a considered manner and maximise the resources they have local to that area.
These businesses can have anything from 2 ‘hub’ offices to up to 10, and at times will look at purchasing businesses in a specific location including the premises, to build out that growth strategy (something which is much more unusual with a consolidator purchase). They also have good experience of acquisitions, often having completed tens of acquisitions, which gives you the opportunity to get some references..
Small local acquirers
There are a lot of smaller businesses also seeing the opportunity of making one or two choice acquisitions, to allow them to perhaps use up some capacity they have in their existing adviser base, or buy a business where there are some of the team staying on to continue servicing the clients.
When it comes to businesses they like to buy, geographic location becomes even more important. Often the level of handover is a key factor, to ensure the business integrates new clients effectively – it is always in the interest of both parties to ensure clients are comfortable: the motivation of the buyer is to boost business, and the seller’s payment terms will generally be set around the full business value over the payment period, not solely at the point of purchase.
With negotiation, these deals tend to be the most varied and flexible, since they are not harmonising multiple deals. Smaller buyers of course are generally in the market for smaller businesses – this group are most active in the ‘less than £50M’ FUM space.
A key element of selling to a small business is buyer due diligence. Whilst you may feel more comfortable selling to a business that looks more like yours, being sure of how they will pay, and what their track record of a healthy balance sheet is to complete the staged payments is imperative.
It’s also not unusual these days to see acquisitions coming from outside the advisory space. Private equity companies look at all industries for businesses which can deliver strong returns, and with baked-in recurring income, advice businesses are strong low risk options. Similarly we have been seeing deals from providers and platforms, such as Old Mutual launching Old Mutual Private Clients, an advice arm which supports the growth of their platform.
The motivators of platform or provider purchases are obvious, and that may or may not align to your existing investment approach.
Private equity firms are looking to make a return on their investment, so the operational rhythm is likely to change considerably post this type of sale, with well-defined and likely aggressive growth targets going alongside potential streamlining. A highly rewarding culture, but not necessarily very similar to your prior approach.
As you’ve seen through this series of articles, there is a lot to think of when you’re preparing your business for sale. The good news is professional brokers such as Gunner & Co. are working with these situations every day, so you don’t have to worry about not knowing where to start.
We even run seminars around the country dedicated to understanding more about the process, and how to be really well prepared. To find out about a seminar near you visit www.gunnerandco.com or get in touch today.
In the meantime, if you are actively looking to exit now and would like to have a confidential, non-committal conversation I am always happy to share my insight.
Tel: 0117 9926 335