Given the age profile of financial advisers it’s expected that more than half will want to retire in the next 10 years.
For many, figuring out how to exit their business while continuing to support staff and clients can cause a real conundrum. Different options will tick different boxes, from moral to financial: between wanting to maximise the sale price, while doing the best or your remaining team. It’s crucial at the outset to be really, really clear as to what you will give up.
So, what exit strategy options exist for those looking to retire?
Choices and options
There are only two choices to be made when going to sell a business, either:
- Choice #1 – take the DIY route and sell the business yourself, or
- ·Choice #2 – sell via a broker.
However, within each of these choices there are a number of options available, focused around who the acquirer is:
- Option A – sell to your team through (1) an internal management buyout; or (2) an Employee Owned Trust (EOT)
- Option B – sell to a similar or slightly larger firm – a trade sale
- Option C – sell to a larger consolidator.
There are pros and cons to each one of these.
Weighing up the choices – DIY route or selling via a broker
- Choice #1 - DIY route.
Selling the business yourself may sound like the ideal option. The problem is, it may not be as easy as it sounds and can prove difficult, disruptive, and time-consuming. This is especially true if you’ve never done it before and don’t fully understand what needs to be done. Although very few do, it can be done without employing solicitors and consultants, but this is for those who are likely to have worked in M&A or gone through the process previously. Ordinarily going down this route will still involve employing solicitors and consultants who can overcomplicate the process.
Obviously, it saves on paying brokerage fees by doing things yourself, however a broker should have a database of firms it can market to. Where are you going to find a prospective acquirer?
If you know a likely acquirer then all well and good, but is the timing right for them when you announce you actually want to proceed? Plenty of firms will make all the right noises when you are sounding them out but very few will actually engage once you move to execution. Even with the right intentions, these things may take years for some acquiring firms to build up to.
Using a broker also raises the question as to whether you’re happy with a wider range of people starting to know you are looking to sell, so ensuring it is undertaken discreetly with a few target prospects is more desirable. This comes down to the quality of the broker and their contacts. Firing out your details to their database of 1,000 subscribers verses sending them under NDA to a select few will also likely provide you a very different experience of the quality of the leads.
So, at what point do you inform your team? If you don’t inform them and they get suspicious or find out another way they could lose heart, their work suffer, or they could even leave the company. All at the point you are trying to show a prospect a robust business. This is crucial and a real juggling act specific to each firm but certainly worth some forethought.
- Choice #2 - selecting a broker can also be problematic.
Many will advise that they can achieve a higher value than is possible to get you to sign up with them over a competitor. Once you’ve signed the contract and are ‘locked in’ they might set up a couple of prospective meetings with interested parties where offers will fall somewhat short of your expectations.
If you don’t accept one of these offers, they will often just leave you to stew knowing you can’t get out of the contract. Months down the line, once you’re having concerns and ‘re-engage’, they will set up more meetings and you will receive similarly lower offers than you’d like, but this time resign yourself to accepting one.
It’s very unlikely you’ll achieve the valuation you were originally offered (especially from larger firms) who often adopt the ‘fish and chip’ technique. This is when they go fishing and offer decent valuations (again you’re more likely to go with the higher offer) before then knocking you down once you have done the deal – chipping the price as they go through due diligence, siting various business performance metrics back to you as justification (it will be in the small print).
Done incrementally over time to wear you down, towards the end you will just want to get the deal done. This means that most firms don’t go at the rates some would have you believe.
Weighing up the options – selling to your team, doing an EOT, trade sale or consolidator
- Option #A (1) - an internal management buyout.
There are several key benefits to selling through a management buyout, including:
- It eliminates the time-consuming task of finding a trade buyer
- There’s no need to approach competitors and disclose sensitive or proprietary information
- You can be confident that you’re leaving the company in ‘safe hands’ (This can be particularly important if you have a strong emotional attachment to the business).
On the other side of the deal, the managers wishing to buy already know and understand the business, which helpfully reduces uncertainty and, to a large extent, can also eliminate the risks of buying. However, they’re also likely to know about any skeletons in the closet, which could drive the price down in any conversations (but hopefully this isn’t the case).
An internal buyout has advantages for both buyer and seller, the most obvious being the smooth transition from one owner to the next. Since the buyers are already closely associated with the business, their continued presence can be comforting for clients, partners, and employees.
This route can also be done with minimal disruption and the business can continue to operate as usual. Clients can be informed much earlier and join you on the journey making the transition seamless.
However, if the process is unknown to both sides and there is no guidance the whole process can be overcomplicated and protracted. Employing solicitors and consultants can overcomplicate the whole process so speaking to prior clients of those firms and receiving recommendations will put you in a better position.
The success of a buyout isn’t a given and relies on the expertise of the current management. If a company is being sold from distress or administration, the finance organisation may investigate the role of the management team in the company’s performance. If the financing firms determine that the buyout team were in part responsible for the decline in business success, funding may be pulled, causing a significant roadblock to the sale.
Even where the company is healthy and profitable, financers will closely examine the skills and experience of the buyout team. If they believe you have an overbearing influence on the success of the business, there’s a chance that they will decide that the strengths of the remaining management team are insufficient to drive the company forwards and again could pull funding.
- ·Option #A (2) - an EOT
Just like the standard management buyout the benefits of an EOT are very similar, although they haven’t been around all that long, having been created by the Finance Act 2014, to encourage more companies to become employee owned.
Simply, an EOT is a trust that enables an owner to sell/transfer the company to its employees. This helpfully creates two tax breaks for many business owners:
- Owners selling their shares may do so free of capital gains tax
- Once a company is owned by an EOT, it can pay annual bonuses to its employees free of income tax.
Once the price has been agreed, which must not be more than market value and verified via independent assessment, payment can then be made. Ordinarily this is via instalments from the company’s future profits. However, it can be possible to arrange an external loan which will enable the purchase price, or a significant chunk, to be paid in one go.
- Option #B – Selling to a similar or slightly larger firm, such as a trade sale
As with funding a management buyout, financing may be the biggest obstacle to successfully selling your business through a trade sale.
High street lenders have limited or no financing options available for supporting adviser transactions. Plus, the terms and structure of any finance can be prohibitive. Financing often requires a personal guarantee, equity injection, and other debt-servicing challenges.
It’s important to check straight off with any potential purchaser that they have the funds available and where they are coming from as it can be very disheartening to get a considerable way down the line before finding out that they don’t have the funds to acquire you.
However, you are much more likely to find a better fit partner. A firm with a similar view, approach or values where it will cause the minimum of impact to your clients or your staff.
- Option #C – Selling to a larger consolidator
There is also a moral dilemma when considering selling, especially to a consolidator. You’re more likely to receive a higher value from a consolidator than through a trade sale. However, the higher value may come at a price for your staff and your customers.
Consolidators seek to find appropriate advice businesses where they can consolidate revenue, clients, and FUM.
Typically, they will be seeking to form a single entity that operates in-house portfolios and platforms that increase margins overall and seeks to capture more value.
Because the business model is predicated on making a significant number of acquisitions each year and creating incremental value from increased earnings multiples and recurring revenue, this could be a simple option for many IFAs seeking to retire.
Be warned, though: not all consolidators are equal.
Some consolidator firms are building large businesses. While these could prove to be a good home for some firms seeking an exit, the model tends not to be ‘client-centric’ and can be seen in a dim light by some for various reasons.
The two most notable drawbacks are:
Consolidators generally seek to migrate funds under management to their restricted portfolios and platforms. Obviously, this won’t necessarily put the needs of customers first or optimise for ‘treating customers fairly’ – which could either become a bigger problem or be solved by the new Consumer Duty rules.
Selling to a consolidator can be highly disruptive. A transaction of this nature could harm the business philosophy and operations of the advice firm. It may also require staff to be subject to contractual restrictions that limit their ability to create value for themselves.
Perhaps unsurprisingly, this route is seen by many as the least favourable option for clients and staff because it goes against their business philosophy, yet there can sometimes be little option.
Other considerations
The traditional valuation metric applied to advice firms is around 2% to 3% of assets under management. In recent years, where consolidators have been able to access capital at very low rates, valuations have crept higher, with some as high as 8%.
Higher valuations and higher multiples are only paid where the advice business has a very similar model to the acquirer with many elements aligned (usually medium-sized advice firms) or where the acquirer can see that it would be easy to transfer clients to their own central model with minimal effort (small advice firms).
Also, acquisitions very rarely result in you being paid upfront. Most involve an earn out structure where a percent of payment – typically around 50% – is deferred for 24 to 36 months. This means the buyer expects to pay out the other half of the deal cost through future cash flows, based on retention of clients and other targets.
If you’re looking to sell your business, whatever choice or options you decide to pursue, it’s always better to plan in advance ensuring information is easily accessible and clear to understand for any prospective acquirer. This can significantly increase the value that you will receive.
So, to give yourself the best outcome take time (at least two to three years, if not more). Make sure everything is in order, clearly accessible and easy to understand. If there have been issues or there are still skeletons in the closet, deal with them or highlight them in your prospectus, otherwise they will come back to haunt you.
Good luck.
