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Exit Planning for Financial Advisory Businesses

Exit Planning for Financial Advisory Businesses

Although M&A activity in the IFA market may have declined since its peak prior to the implementation of RDR, there is still a high demand amongst buyers for high quality IFA businesses. However, in an industry that has seen significant change in recent years, it is difficult for owners to formulate exit strategies and optimise the value of their business. Indeed, very few firms have the formal structures and processes established to facilitate succession and exit.

Selling your IFA business is the culmination of years of hard work and so it is important that you get it right.

The market

There are approximately 24,000 Registered Individuals providing advice to the public via Independent and restricted advisory businesses and networks. Ostensibly there are three types of small to medium sized businesses in the market today (in both the restricted and independent space):

  1. Those which were RDR ready and have been running true financial planning, fee based advisory businesses for many years. For them, little has changed since the RDR implementation and it has been business as usual. These businesses command the highest price from buyers as their models are the most profitable and sustainable.
  2. Those which reluctantly embraced change and were late to adopt the requirements of the RDR but “made it over the line” and have continued to trade almost certainly with thinner margins and with an increase in time spent on regulatory issues in their businesses. These businesses are attractive to buyers but will command less than those businesses more compatible with RDR.
  3. Those which, since their inception, have paid lip service to both regulatory and professional business best practice. They continue to pay lip service today and try to make as much money as they can from doing as little as possible. These businesses are saleable but at much lower values.

Many business owners who exited prior to RDR did so during the fire sale that took place during 2012. At that time the sale and purchase currency was multiples of old world trail commission and we witnessed multiples as low as 1.5. The exit of these firms has raised the value of those businesses that remain.

Now that the impact of the RDR is known many advisory firms have chosen to re-model their businesses and implement robust servicing regimes for those clients they wish to work with (and, more importantly, those who can and want to pay on going advice fees of up to 1%).

RDR has therefore increased the valuations we are seeing in today’s market by:

  • encouraging low quality businesses to exit the market, which thereby reduces the supply of companies available for acquisition;
  • increasing the quality of those businesses left in the market and making them more valuable assets; and
  • forcing consolidators to seek profitability through scale as tighter regulations hit margins in their existing business.

We are therefore seeing a much more seller friendly market and multiples of recurring income as high as 3.5. Moreover, we are aware of some acquisitive buyers who are willing to pay even more for businesses with the right attributes, such as a highly qualified and committed team of RIs or a loyal client base.

Selling your business

In looking at a business sale, one of the major problems for an IFA is finding a purchaser. There are several ways of doing so. Some larger firms are always on the lookout to buy smaller practices, and many run what are effectively dating agencies for buyers and sellers to get in touch.

There are also firms who specialise in selling companies and matching potential purchasers and vendors. Many of these firms act as business brokers rather than providing a tailored service specifically for advisory firms.

These firms can help but sellers have to ask if they are getting the buyer that they really want and whether these firms care as much about the surrounding issues of the sale as you do, or whether they simply want the deal completed.

The vast majority of advisory firms care hugely about their clients and have spent a lifetime doing their best for them. They have developed personal friendships and built up trust and goodwill. Many owners may be loath to sell their business because they fear a buyer will not treat their clients in the same way. Corporate brokers may not have the same concerns; it is important to find the buyer that is right for you.

Planning for an exit should be a fundamental activity throughout the period of ownership of an advisory business. Preparing for the final sale should be seen as a long term process, including time post-sale to manage the “handover”.

In preparation for a sale, there are several steps that owners can take to increase the attractiveness of their business:

  • Buyers can only buy what they can see, so make sure that all informal arrangements you have with introducers are properly documented in written agreements. Buyers want to know that they will have a continued source of work following the transaction.
  • A buyer will want to know everything possible about your business before completing a deal and sellers are often surprised at the sheer amount of data that is requested. Make sure you are prepared for this by ensuring your records and documents are organised and up to date. This demonstrates a well ordered business that instils confidence at the outset, and expedites a process that can take time. In this regard, it is worth ensuring that there is capacity in the business to service clients during times when you are unavailable.
  • Analyse and segment your clients. The work that you have done in valuing each client in preparation for RDR is a good selling point – buyers want to see a tidy client book and identifiable revenues. Make sure income figures are clear, particularly the income break down by business class for at least the preceding 12 months, and be ready to provide a breakdown of assets and income per client as well as provider and wrappers analyses.
  • Take time to review your terms and conditions, and make sure that all clients have signed up to the most recent version. Buyers want certainty of their legal rights and obligations.
  • Consider pre-exit planning in addressing any shareholder issues
  • Complete a legal audit and health check to ensure the due diligence exercise presents the best picture of your business to any potential purchaser and mitigates the likelihood of a price chip
  • Be prepared to work with the buyer after the transaction. The value of your business is in the contacts you have made and the buyer will want your assistance in transferring these to them.

The frenzy to sell is over and the competition for quality deals is intensifying, providing a great opportunity for business owners who are wishing to exit the industry. If you are considering selling, please get in touch to discuss the options that are available to you and how best to prepare your business for sale. 

This guide was written by Sam Mabon

Sam Mabon is a Corporate Partner at Brabners. He specialises in advising clients in respect of corporate transactions, financing, members’ agreements and disputes. Sam also advises clients on a wide range of commercial work, including terms and conditions of trade, online terms and policies. Sam’s clients include PLCs, UK subsidiaries of foreign entities, LLPs, SMEs, start-ups and high net-worth individuals.

Sam has over 10 years’ experience in buying and selling financial advisory firms and component parts of their business. Sam regularly advises regulated firms in respect of all manner of business activities including, but not limited to, introducer agreements, call centre contracts, PIE Service Agreements and IT infrastructure contracts.