‘It’s not where you start, it’s where you finish…’ goes the song however I wonder just how many people working in our industry have any clue about their exit strategy and how they intend to make it happen?
How do you firstly develop value in your business which isn’t just situated within you as the individual running it? Secondly, how do you appeal to those who might be interested?
Although possibly providing a good income for the owners, potential buyers can see little value in paying a significant sum for a business based around a client bank that is often not fully updated or computerised, has minimal renewal income and carries a large potential debt from unearned indemnity commissions. After all, indemnity commission is in effect an interest-free loan that can be called in at any time in the next few years. This is, understandably, a real dilemma for all firms in the mortgage and protection advice market.
Perhaps we can look to our IFA ‘cousins’ for an indication of where we might be able to head. In recent years, especially in the build up to the introduction of the RDR, a new breed of ‘consolidator’ firms launched with the express purpose of buying IFA practices of all sizes with owners often getting a significant initial lump sum.
Of course, the mortgage and protection market has not had an RDR-type environment shift to confront. There are no consolidator-type businesses in our sector, probably because of the transactional nature of mortgage advice, the way the bulk of income is generated, etc. IFA consolidators were purchasing based on recurring income levels, etc, but the trail commission levels of mortgage advisory firms are often not on a par with the investment/pension world especially where based on indemnity commissions and with low levels of general insurance sales.
My advice for such firms would be to make sure their business is in the best possible state to be sold. Firstly this means some advance planning. Business owners don’t suddenly wake up one morning and decide to sell, it’s often on their mind for years. So to attract significant value for the sale of the business it means proactively taking steps over the years ahead of a planned sale date to de-risk and build a strong technology-led business with maximum renewal income. No serious purchaser is going to want to invest significant money up front otherwise, particularly if there’s the chance there could be a bigger liability sting in the tail down the line.
If that attraction isn’t there then I’m afraid the chances of achieving the exit you want will be greatly diminished.
Richard Adams is managing director of Stonebridge Group