Money Management - 1st February 2007
Planning Your Exit Strategy
How does an IFA see on his practice when he comes to retire? Succession planning is vital and needs careful planning. Simon Burgess, managing director of Britishinsurance.com, looks at how to plan your exit strategy
IFAs are getting older. According to a recent report by the Association of Independent Advisers (AIFA), in association with the Daily Telegraph, 34% of IFAs are aged 45 – 54 (see Box 1). That means over one third of IFAs currently in business right now are hoping to retire over the next decade or so.
But can they afford to do so? Despite their knowledge of financial affairs and markets, the financial adviser community seems determined to make things as difficult for themselves as possible.
There are two reasons why IFAs enjoy a huge advantage over many other sectors of society when it comes to retirement. Not only should their professional knowledge give them a head start when moulding their nest egg for the future, but they also have an asset in their business practice, which can me mined on their decision to leave the market for both short-term capital gain and ongoing remuneration.
IFAs may spend much of their lives discussing retirement planning with their clients, but when it comes to their own situations they have surprisingly shown a resolute stubbornness in structuring their own affairs to their best advantage.
How many IFAs know the true worth of their business? How many clients are regular fee or commission generators? How much of the clients’ portfolios are managed by the IFA? See details in Box 2for how to assess the value of an IFA practice.
If an IFA does not know the answers to these questions they do not have an understanding of what their business is worth and, more importantly, will be in a very poor position winded when it comes to retiring for themselves and maximising the possible funds that they will be able to withdraw from their business after years of endeavour.
So what are the options for an IFA looking to retire and take maximum value from their business? In short there are really only two options, which both resolve around a sale. Either they can sell the practice on to another party, whether it be existing partners or another firm entirely, or they can seek to groom a successor who can then take on the practice and its clients and move it forward into the future.
Both require careful thought and a good deal of planning, but if managed properly will bear both immediate and long-term gains.
In both situations in it imperative that IFAs get a firm grasp on their business. Who are the clients? Where does the practice really generate its income from? Are portfolios spread across the market or lodged on a single, easily accessible platform? Where were the assets under management last valued? Where is the potential for growth?
Not only is it important to really understand the business as it stands, but also to have an appreciation of where it is going and the opportunities that are available. Accounts may have been worked ain a restricted way or only focused on one aspect of a client’s needs and there may be room to grow the services given to clients and the products sold. Where an individual can identify these opportunities and show how clients can be stretched then it will make very interesting reading for anyone looking to buy the business.
Depending on the current make up of the client base an adviser may want to shift things in a particular direction. If, for example, there are a lot of life policies currently on the books which carry clawbacks and possible future liabilities, it might pay to look at alternatives for some clients or really investigate how the products sit with others.
The end result of this activity should be a clean client database that offers a clear and easily accessible picture of the practice and what it offers. In the meantime, the amount of client contact involved in such a move is likely to generate more business and help bring old clients back into the fold; it can also highlight other clients who are unlikely to require further services of any note.
Finding a buyer
In looking at a business sale, one of the major problems for an IFA is finding a purchaser. There are larger firms always on the lookout to buy smaller practices, and many run what are effectively dating agencies for buyers and sellers to get in touch.
Sesame, for example, offers an independent online business exchange run by Collette Barber and Jeff Travis, which allows firms to either advertise themselves or find potential purchasers as well as offering access to business advice regarding such a move.
Sesame aims to develop the service and according to Alastair Conway, Sesame’s head of propositions and commercial development, will be looking to see what other services can be offered to the market in the coming year. Bankhall and many other major players in this market also offer access to advice and information, but not always in terms of finding a possible suitor for the business.
There are, however 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 IFA firms.
Yes they can help but intermediaries 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 the IFA does, or whether they simply want the deal completed.
The vast majority of IFAs 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 IFAs may be loath to sell on their business because they fear a new buyer will not treat their clients as they have done in the past.
This is no doubt true, but there seems to be a deeper element to it. It seems that service is not the only issue and IFAs do not want to be seen to sell the interests of their clients down the river in order to line their own pockets. IFAs are very proud of the ‘clients first’ philosophy that their entails, and in a sale they do not want this to be compromised in any way or feel that they have in some way sold out for their own benefit at the expense of their clients.
In finding a purchaser there is no substitute for networking. Speak to peers and colleagues and let it be known that a sale is being considered. Seek out other local firms that may begin to get a feel for the opportunities that may be available in the local market. It these are slow to appear then a carefully scripted advertisement of piece of marketing in a trade journal may help to get the ball rolling.
Ideally any IFA looking to retire should be making preparations at least five years in advance of when they want to sell. Not only will this allow them to make a full assessment of the business as it stands, but also give them time to search out the right buyer and go through the necessary due diligence before any purchase is made. If will also allow for time to be spent working under the new owner to ensure that clients can be handed across effectively and as much value as possible retained in the practice.
Unfortunately there are no guarantees in agreeing terms with a buyer and human instinct, and a close look at the way they run their own operation will have to suffice.
The IFA market is slowly realising that increasing revenue from ongoing trail commission and charging upfront fees will help cash flow, generate value in a business and make it easier to sell in the future.
There is no doubt that for purchasers in the market a business run on such a model will be more attractive than one run on upfront indemnity commission where no fee is charged to the client.
Whether or not IFAs looking at an exit strategy will be able to change the model that they operate, want to change the model that they operate or even feel that it is necessary in a discussion all in itself.
However they have to be aware of what a buyer will be looking for. This is a far more important consideration than the actual status of the business. Whether it is a limited company, a sole trader operation, or a partnership, a buyer will be more interested in the money generating side of things and can always change the status in the future to suit their own commercial needs and position.
If the book of business is based solely on initial commission and carries many policies with the possibility of indemnity clawback, it is easy to see why a buyer will not be as interested in a business with regular fee-paying clients and a lot of funds under management (See Box 4).
Partnerships
While the status of a business may not be as important as the structure of its client base, it should none the less be considered. In general a partnership will be dissolved and then reformed under a sale and offers unlimited liability to the partners within that partnership. This may not be something that a new owner wishes to take on. If selling to existing partners, it should not present such a problem. However if a new partner is being brought into the fold, negotiations may have to take place as regards to changing the business’s status.
As a limited firm the owners are liable for a capped amount, which may revolve around the amount of borrowing that they have from the bank, the amount of money that they invested in starting the business or perhaps the amount of money that would be required to settle any long-term lease taken out on premises.
Long term liabilities
For anyone buying into a partnership, it is unlikely that they would also buy into the unlimited liabilities and any historic problems would remain a matter for previous owners. How this is structured is again up for negotiation, but may revolve around the previous owner being liable for the excess on any liability policy should it need to be incurred and the subsequent rise in premium resulting from a claim.
For IFAs selling their business the best solution is often to take out run off cover with the provider they have held their professional indemnity insurance with. As John Kearney, managing director at Wingham Wyatt comments: “IFA firms who sell obviously have their own PI up to the point of selling and the route they all choose is to inform their insurers of their intention and switch to run off cover, which they continue with for a number of years.” In turn this will reduce the premiums. How much premiums fall will depend on the type and volume of business that has been written, and the firm’s previous claims record.
How long run off cover is needed will be personal decision for each individual and also depend on the structure of the firm being sold. As a limited liability company, shareholders are not personally responsible for the company’s debts, but directors may be asked to give personal guarantees on loans to the company.
Hence once the liabilities for loans, office rental and such have been dealt with in the sale there will be no ongoing liability for the vendor from clients.
However to set up and run a limited liability company does incur costs and means corporate governance returns have to be completed. Any decision to structure a firm in this way should hence be evaluated on the benefits to the individual versus the costs and ongoing administrative requirements incurred. For a partnership, ongoing liability will revolve around the structure of the sale and the particular agreement that is put in place and certainly sellers should look to pass on as much as is physically possible to avoid any future problems.
For sole traders, the liability arising from complaints relating to the advice they have given in the past will remain with them as they are unlikely to be able to pass it on. It is for these sellers in particular that run off insurance is important. Complaints can come out of the woodwork for years and under current legislation an individual has six years from receiving the advice to make a complaint. However it is also possible for individuals to complain about advice for a period of three years from the time it was reasonable for them to have realised there was a problem. Under this second option there is a longstop of 15 years, which gives some idea of the timeframe IFAs should be looking at to protect themselves.
From a regulatory point of view, the FSA has little concern in how an individual selling their firm protects themselves against future liabilities, but will be concerned about the status and capability of the purchasing firm to meet the demands placed on it by the acquisition.
For the deal to complete basic threshold standards relating to capacity, capital resource and management will have to be met. In most situations this should not prove problematic, especially where the purchasing firm is already regulated. If the purchaser is not already regulated then this is something vendors should consider as it may take more time for the deal to gain FSA approval.
What about successors?
For IFAs looking to bring in a successor and then sell the business on to them in time as they take over the reigns, it is necessary to prepare the practice in the same way as for a straight sale, although the processes involved will take a good deal longer.
Again one of the real problems comes in finding a suitable individual to take on the mantle of future owner. Here it really is imperative to use work of mouth and speak to as many people as possible regarding individuals who may be appropriate. Larger firms are likely to offer the best potential individuals, but singling them out can be difficult.
The next problem is that these individuals will have to be trained up to operate in the way in which a particular IFA likes to run their practice, while going round the client base will take time. Both mean a large investment of time and energy and will see the existing owner struggle to spend as much time in front of clients, actually earning.
The irony is that potentially this is a wonderful opportunity for younger advisers – buying into a ready-made client base with a firm up and running compliantly and ready to be driven forward. However, younger advisers will not always have access to the necessary capital, they may not want to borrow the money and take on the financial risk and are difficult to find.
Planning is everything when it comes to selling an IFA business and those prepared to do the legwork and put in the effort will reap the rewards that their years of professional labour will have created.
Leaving it too late and being ill advised of the structure and client base will make it more difficult to extract that value. As any IFA knows, taking time to evaluate the current situation and make a robust yet flexible plan for the future will deliver the best results every time.
Box 1: IFA profile
91% male
9% female
34% were between the ages of 45 – 54
33% were between 35 – 44
47% had one adviser in the firm
47% said they had between 2 – 14 advisers
Source; AIFA in association with The Daily Telegraph
Box 2: How much is your business worth?
Take the time and pay for a professional valuation to be done. However there are some things to consider. In general the number of clients a practice has will not be an issue although there are instances where buyers have paid per client. It is more likely that renewal or fund based commission will be taken into consideration with a buyer paying anything between one and four times renewal commission. For initial or indemnity commission a buyer may look to pay a percentage of the initial commission they earn in the future from clients although this can vary hugely. Fee based or fun based clients tend to be the most valuable and a buyer will pay a different multiple of repeating income depending on what the link is. Commission from money under management will be the most valuable, followed by renewal commission and then initial commission. However remember that every sale is negotiable and there are no hard and fast rules. Valuations are just that and unless someone is prepared to pay, then they are worth nothing.
Box 3: Business links:
This government site provides information on many aspects of business including purchase and sale:
http://www.buinesslink.gov.uk
Commercial business brokers:
http://www.daltonsbusiness.com
http://www.businessesforsale.co.uk/
http://www.forsalesold.co.uk/fss/Start.asp
Box 4: Tips for sellers
Make sure the client database is in good order and sales figures are clear – particularly the income break down by business class for at least the last 12 months.
Obtain a professional valuation
Be flexible to negotiations and different structures of any possible sale
Have clear goals regarding your clients and your own personal situation to help structure your own personal ideas regarding a sale
Box 5: Case study
Margaret Hopkins of Chase financial Advisers wanted to retire before she turned 60 and although she had not detailed her exit strategy, was guided by the timing and began to push for a solution as time ticked on. Initially she had looked to train from within but says, “It is difficult to find the right person – if you spend a great deal of time training them, there is also the worry they can leave having garnered all the experience and qualifications they need.”
In the end she sold to a practice 10 miles away called Wingham Wyatt. Margaret says she knew the previous owner of the practice, Bob Wingham, and had met the present owner John Kearney through professional connections.
Through word of mouth they realised that one was looking to buy and the other sell and discussions began. Margaret says that she soon realised that Wingham Wyatt would take care of her clients as she hoped. She agreed to move across in the sale and spend time passing over her clients and was delighted that positions could also be found for both of her administration staff.
To take care of the future liabilities she has agreed to pay the excess on any claim, which will be met by Wingham Wyatt’s liability policy. The sale also meant that the practice benefited from the more advanced IT systems in place with the new owner. As it was there were three directors at Chase. Margaret did the financial services while the other two directors took care of the investment side of things through a separate firm.
The sister companies were split and the advisory firm sold independently. Margaret says she is not only happy that the sale went ahead to a person that she trusts implicitly with her clients, but also that she has been able to take value from the firm in order to enjoy her retirement.
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