IFAs have options if they want to realise cash from their businesses, argues David Hesketh, group M&A manager at Perspective Financial Group Ltd
As an acquirer of IFA practices we are only too acutely aware of the difficulty many owners have when they wish to realise capital from their business and reach a decision to sell.
Many owners are simply unsure about what their actual options are when making a decision. So what are they? The two options are either choosing to sell the firm’s client bank (also known as a ‘trade and assets sale’) or selling the business in its entirety as a going concern (also known as a ‘share sale’).
This is the first step on the path towards deciding what to do. But, for those businesses considering their sale options, what are the differences between a client bank sale and choosing to sell the entire firm? And are they going to maximise the value in the business by choosing to pick one option over the other?
Generally with a client bank sale to another IFA practice, the vendor will adopt all the systems, procedures and brand of the acquiring firm. With a share deal, the company is acquired in its entirety and key management, brand and advisory processes may remain. In this instance, the vendor may recognise that the value of the management team, the brand and the systems servicing the client bank is worth more than the client bank alone.
In terms of simply selling the client bank, there are a couple of obvious positives. If time is of the essence to the owner then a client bank sale will clearly have its appeal they can normally happen quickly as long as both vendor and purchaser are up to speed and they will generally only involve the vendor having to stay with the business for a short period of time after the deal is completed. The exit can be short and sharp and it will mean that there are no ongoing ties between the newly exited vendor and those who have purchased the client bank. In essence, the owner can be paid and gone in double-quick time.
However, a client bank sale is unlikely to maximise the capital value of the business or create an ongoing income for the vendor. In my experience, there are very few owners who want this short, sharp, shock approach.
There are therefore some potential advantages to selling the business, but remaining involved, rather than just selling the client bank. It will be obvious that the firm as a whole will normally be valued in excess of just the client bank. Purchasers and vendors can mutually benefit from an ongoing profitable concern where the staff, brand, management and client proposition are all retained. In effect, nothing need change too much post-deal and this will clearly appeal to purchasers who will not need to spend inordinate amounts of time pitching a new proposition to clients or having to inject resource into developing a new offering.
In terms of the quick exit strategy, as stated, most management individuals will not want to leave rapidly from a business which they have worked hard to establish, grow and develop. Instead, an offer which means they can be both well-remunerated and incentivised to continue to manage the practice for a specific length of time, while realising capital from their business, is often better received. This option provides a significant level of flexibility for the vendor to continue to work, in our case, throughout a two-year earn-out period. After that, again they are free to choose whether they stay on or not.
Through this option, management are not only retaining their autonomy and maintaining their status as the ‘Principal’ of the business but they are also in full control when it comes to taking the business forward. Most acquiring businesses will set the newly acquired management team key performance indicators and financial targets to hit if they are to receive the deferred element of the purchase consideration. I can think of few individuals who would want to walk away from the business and leave hitting these targets to others – therefore selling the firm in this way keeps them heavily involved and incentivised throughout the buy-out period.
A client bank sale does what it says on the tin it hands over the adviser’s clients to someone else to look after them. Again, many business owners are uncomfortable about this as there is no guarantee that service standards will be maintained selling the firm and staying in situ means there can be much more stability for both clients and staff who can be assured of ‘business as usual’. The quality of the service throughout the operation need not suffer at all.
All in all, those considering the client bank sale option should certainly think about the value they can extract from this method and how it might compare to selling ownership of the entire firm. We should also not forget that the latter option can also be particularly advantageous as a means to extract capital from the business in a tax-efficient manner. An element to be considered in any potential sale.
In all likelihood, potential vendors of IFA practices will only get one shot at a sale and therefore they should ensure they maximise the value of their business. Underestimating the firm’s value as a going concern could be a mistake and, at the very least, owners should discuss all available options with potential purchasers before choosing to sell anything.
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