Last week we were delighted to host an adviser event in Edinburgh on the topic of Buying or Selling your Financial Advisory Business. The seminar was aimed at those looking to buy or sell their advice business either today or at some point in the future and want to maximise the sale value.

In our view, no matter what your plans are for the future it is simply good business practice to have your firm ‘sale ready’. You never know when a potential opportunity could come knocking…

With this in mind, I will share five tips from the event presentations and panel discussion aimed at helping you to maximising the sale value of your advisory firm. From what buyers are looking for, to ‘what they’re buying when they buy’ and how to prepare your business for sale – even if you plan to exit in five to 10 years from now.

Planning for the sale of your company should begin on the same day you start trading.

WARREN BUFFETT
What do buyers look for?

Unsurprisingly, buyers are looking for a business that will return value to them within the quickest timeframe possible. Dennis Reed, Group Development Director at Fairstone said: “It is not what you buy today, but what you can hold onto” – clients, key staff and assets.

A business that is operationally efficient, with a clear and compelling value proposition, engaged clients and strong compliance framework will be far more attractive than one that falls short in any of these areas.

Due diligence is crucial and should be undertaken by both the buyer and the seller to ensure a good ‘fit’. The culture of the businesses must aligned to ensure the longevity of the marriage.

What is the buyer actually buying?

The buyer is buying the opportunity to realise value from two particular types of assets: advisers and clients. Unfortunately, both have legs. When you consider your own firm, how likely is it that the advisers and clients will stick around once the dust has settled on the acquisition?

Maximising the sale value of your advisory business

Linda Preston-Todd, Bankhall’s Head of Bespoke Solutions, cautioned that firms continually underestimate the work involved and the steps required to prepare their business for sale.

This is completely understandable, given many business owners are deeply involved in the day-to-day operation of their firm and conducting client meetings. However, it can result in exit planning left to the last minute, which can be detrimental to the firm’s sale value.

Tip 1. Start planning with a minimum two-year timeframe. Include your exit strategy in your long-term business plan. Making it an objective and reviewing it on a regular basis will ensure you remain on track toward achieving your goals.

Tip 2. Review your business structure. Consider how your business will look to a potential buyer. Is the structure overly complex? If so, simplify, simplify, simplify. An overly complex structure will not only reduce the value of your business it could also delay negotiations.

Tip 3. Consider your regulatory oversight, including systems and controls. Are your systems and controls robust? Can you demonstrate how oversight within the business is managed, including any services outsourced to a third party that you are responsible for? Not only should you be able to articulate your current business mix, but also any historical activities your firm may have ceased due to a de-risking of the business.

Being prepared and knowledgeable about any regulatory correspondence the firm has received, along with the outcomes, will provide assurances to any potential buyer. Also ensure your latest compliance reports and file checks are available. These serve to demonstrate an independent third party’s view of your business.

Tip 4. Establish a clean line of sight to your clients. Ensure you can readily demonstrate the number of clients your firm services and the income generated from them – current client agreements must be in place and will be relied upon. Identify your key accounts and the amount of value they add. Remember: a buyer is not buying what your business represents today, but what they manage to retain. How likely are your clients’ to stay after the acquisition?

Tip 5. Ensure key stakeholders in the business are shareholders. As for tip 4, the ability to retain key staff is crucial to the sale value of your firm. All employees must have an up-to-date employment contract. One of the best ways to ensure the alignment of interests at the point of sale is to make sure key staff are also equity holders. The assets of the firm need to be held by the firm – not individual financial advisers.

Unfortunately, unlike accountancy firms, there are no hard and fast rules for valuing a financial advisory business (an accountancy practice will be valued between 0.8 and 1.2 x annual fee revenue). Dennis made the point “No two financial advisory firms are constructed or operate in the same way, so how can we expect two advisory firms to attract the same value?”.

As a result, a buyer will look at all manner of factors to determine the business valuation. From the quality of the client bank, to the services on offer, compliance track record, sources of income and staffing – to name but a few.

If you want to maximise the value of your firm it is vital to consider how your firm will look to a potential buyer, with as little complexity (and embedded risk) as possible. It goes without saying that a concise value proposition with engaged clients and staff, supported by robust processes and controls will no doubt generate a higher sale value.

Having read this article, would you consider your business ‘sale ready’? We’re keen to hear your thoughts, so please post your comments in the space below.