Selling an adviser business
In our second article on adviser company acquisitions, we look at the process, the pitfalls, where deals fail and highlight three top tips for business sellers.
Adviser business owners looking to sell their firm need to take a logical and measured approach to the process and to be sure of both their motivation and that of the potential buyer or risk the deal falling through, or not achieving the financial goals.
If a deal falls through, then trust can be lost by the market, the stakeholders in the business and the firm’s clients, which is likely to impact the value of the business should another deal be sought, said Dominic Rose, sales and acquisitions director at Bellpenny.
What was important Rose stressed was to get things right from the start, to ensure that there was good fit between the buyer and the seller and that the aims of both were aligned.
Rose said business owners needed to keep in mind what is being bought and sold. “A firm’s assets are its clients, their relationship with the firm, and its people. If anything impacts those assets then it could devalue the business. So it is important for the buyer and the seller to ensure everything goes smoothly.”
The danger for advisers selling their business is that loss of value in the business particularly where a deal is contingent on certain metrics being achieved post completion, could affect the total payout to the seller.
As highlighted in the first part of this article, acquisition deals usually pay out in stages, an initial payment on completion followed by contingent payments at 12, 24 or 36 months. Those contingent payments will rely on the firm meeting set objectives, i.e. delivering what was promised.
To that end, of an eight step process that an acquisition requires to be successful (see below), said Rose, “the most important part of the process” is the very last part, the integration between the buying and selling entities. “There’s a lot of things to consider and you must know how it is going to be achieved and what you are going to do.” Questions to be asking, he suggested, included: How will clients be contacted and advised about the sale? How will the phones be answered from day one? How will commissions and fees be reconciled? How long will it take to change agency details and will providers try to turn off trail at novation? All these elements if not handled in the right way can have a knock-on affect on the ongoing success and profitability of the business and in turn, on whether the payment objectives and metrics are achieved.
If it’s a purely arbitrage deal, Rose said, it may not be necessary to integrate the two entities but with most sales “if you are looking to deliver success for the client, the seller and the buyer, then the businesses need to be integrated successfully”.
He said: “To put it into perspective, at Bellpenny we have 10 people whose full-time job is to deal with integrations, because there is so much detail to deal with.” And he warned, “If the process is not thought through from the start and if the integration doesn’t happen smoothly, income isn’t received and clients walk out of the door then nobody wins because business value is destroyed.”
Firm eye on the reasons why
What is fundamentally important he urged, is that adviser business owners looking to sell their firm keep firmly in mind why they are selling the business and what they want to achieve from the sale. This could be to de-risk the business; realise value by taking some capital off the table; to retire from the industry; change career; or achieve a career aspiration to merge and progress up the corporate ladder. Whatever the reason, without that firm resolve, owners risk finding they are in a deal that doesn’t give them what they want, Rose said. “It’s easy for people to get their heads turned by unsolicited approaches talking big numbers but if a deal is to succeed, they have to think ‘why am I doing this in the first place?’ Otherwise they can get pulled off track into doing something completely different to their original intention.”
For this reason it is also vitally important that a fit is found with the right buyer, Rose stressed, and reasons why firms want to buy a business usually fall into one or more of the following categories:
Economies of scale – enabling the larger entity to service a greater range of average portfolio size and so a greater range of clients.
Quality of earnings – there’s an intrinsic long-term value in the business being purchased.
Revenue uplift – opportunity to increase the fees from the business and the clients being acquired.
Take out cost from a business – linked to economies of scale.
Increase long-term value – straightforward valuation arbitrage. Combining a group of smaller businesses to sell them all for a larger multiple than might otherwise be achieved.
The point to remember, he stressed, is that both the buyer and the seller have to be aligned. “You’ve both got to have the same objectives in terms of what you’re trying to do and what you’re trying to achieve. And you can’t forget those objectives throughout what can be a long process.”
Eight step process
Rose outlined eight high level steps in an acquisition process, progression of which “takes a lot of work”, with numerous points where the deal could break down.
1. Origination – finding a business/buyer
2. Establishing a fit – will the deal work for both entities and the clients?
3. Management information – key data for the deal construction.
4. Reaching a deal – signing of Heads of Terms.
5. Due diligence – this could take 4-6 weeks.
6. Legal process – making sure the deal is watertight.
7. Completion –change of hands and first payment.
8. Integration – ensuring the acquisition works and everyone wins.
Each one of these steps needed to be progressed as smoothly as possible and with clarity for the deal to succeed.
If there are two key areas where an acquisitions process could fail, Rose said, the first was a lack of clear communication and the second was a breakdown in trust.
“I’ve seen it happen where one party has said something that has been misinterpreted with catastrophic results for the process. Everyone has to be clear up front and communicate regularly throughout the process,” he said.
But overriding all, for the acquisition to work there has to be trust between the buyer and the seller, he stressed. Generally, trust was built up as the acquisition process progressed but both parties needed to “do their due diligence to validate that trust,” he said. “Trust is so important and so easily destroyed. And once it is gone, more often than not so is the deal.”
THREE TOP TIPS
Rose highlighted three tips to help the acquisition process from his experience of working on over 60 deals:
1. Sellers need to have management information readily to hand. This is the information given to the other party that they will then rely on in order to construct a valuation, he said: “If you are an acquiring party and you ask someone who’s looking to sell for information and they spend weeks scrabbling around trying to find it, then you can lose faith and trust in the entity and the people you are acquiring. If that information is at their fingertips then you are more likely to trust them and that the information you have been given is true and accurate.”
2. Find a lawyer that knows financial services. “Costs can run away with you otherwise,” Rose warned. “You can find yourself having to explain to the lawyer lots of fundamental financial services terms and issues. You may want to find a lawyer who specialises in these types of deals.” There are fixed price deals for the legal costs which are “well worth considering” he added, “because costs will always escalate and eat into the money in your pocket at the end of the day. And make sure the legal side is done well because the legal document is what you’ll come back to 12 or 24 months down the line if anything goes wrong.”
3. Acquisition is not a one-way street. Sellers should not be afraid to ask the acquirer details of what and how they are going to do things, Rose said. “Buyers should have a clear plan and they should be upfront about telling you what it is.” Likewise, it is important that sellers conduct their own due diligence on the buyers, Rose said. “It’s quite often perceived that it’s the person holding the purse strings that needs the information but the process is a two-way street. The seller also has to get information on the person they’re talking to. They need to give you information on the funding of the business what their proposition is, what are their processes. You’ve got to get underneath the bonnet on both sides.”
Read part one of this article: Adviser firms valued at 1.5x-3.5x recurring income