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As we head into the Autumn, the dulcet tones of the in-flight attendant may seem like a distant memory. But those oft-quoted words have got me thinking that, just like your clients, you will want to exit your business some day and perhaps enjoy more holidays in sunnier climes.
As you think of ways to exit your business, your thoughts will naturally turn toward a sale. Other options, such as a management buyout and internal succession planning are becoming more popular, but there’s little doubt that a sale is more common.
That, of course, raises the $64,000 question: How can you maximise the value of your business?
The answer lies in understanding what motivates buyers and how they value advisory businesses. Our ‘Dispelling the valuation myths’ report, from March 2016, looked at this very question.
Survey findings
Among other things, the survey found:
The expectations of business owners, and the reality of the price they were offered, were often different
Tempting, but highly conditional offers, may well leave vendors disappointed in the longer term
Vendors will look to limit their liability to historical advice
The ability of the vendor to prove rigorous controls, advice processes and compliance, greatly enhances value
A strong brand enhances value, compared to a business which is essentially a home for a group of self-employed advisers
When valuing advisory businesses, profits were considered more important than recurring revenue
You can download the full report by clicking here.
On that last point, I can’t help feeling that the move towards valuing a business in a more traditional way, as a multiple of net profit or EBITDA makes sense. After all, when did you last hear Peter Jones or Deborah Meaden value a business in any other way on Dragons’ Den?
They don’t and there’s a good reason for that; turnover is vanity, profit is sanity.
What about your clients?
For many vendors, the success of their business is founded on the client service that they provide, which ensures that their clients remain with them over the years. Not surprisingly, our research found that vendors care greatly about the way their clients are serviced in the months and years following the completion of the sale.
Many of their clients will have become friends over the years, who they still want to be able to look in the eye after the sale, not have to cross the street from, because the acquirer shoe-horned them into an expensive and unsuitable investment proposition.
I’d go as far as to say that how clients are treated post sale, is as important as the sale price for most advisers.
What are you actually selling?
There are two things a vendor can sell:
The equity of the business
The goodwill of the business
A vendor will want to sell the former as it releases them, to a significant degree, from the contingent advice liability and will probably result in a lower rate of tax being paid.
Despite the movement of ongoing advice fees(from one entity to another), being more complex than a simple novation was in years gone by, the acquirer on the other hand, is likely to find the second option attractive. Not least because it absolves them of any liability for the previous advice.
So, here’s our list of things you can do to improve the value of your business, make it attractive to an acquirer and, hopefully, agree a sale of the equity rather than the goodwill.
1. Manage risk
Take advice, subject higher risk business to pre-approval or double checking, think carefully about how an acquirer will use perceived risks in your business to drive down their offer.
2. Keep excellent records
Being able to easily answer an acquirer’s questions will give them confidence, while aiding a smoother sale process.
The quality of your records may also be the difference between an equity and goodwill sale. After all, a complaint can’t be defended without the relevant records. If you always have an eye on future due-diligence, you’ll record the things that matter.
3. Future proof your business
Currently, some deals are done on a multiple of reccurring fees, others on a multiple of net profit or EBITDA.
Who knows what will happen in the future?
Future-proofing your business, so you are attractive to an acquirer, whatever method they use, makes common sense. Non-profitable, loss leader type business, bought in to bump up reccurring revenues, does not.
4. Build a brand
In days gone by, client ownership (as far as anyone can own or control another person) was all important. However, recent court cases demonstrate that adviser contracts, in terms of non-solicitation at least, aren’t as valuable as once thought.
In multi-adviser practices, building a brand, which clients value and want to remain with post sale, is therefore crucial. Wherever possible the customer should buy into the business, not just the adviser.
We could (and will) write a whole blog on brand building, so watch this space in months to come.
5. Make the acquirer’s life easy
The easier it is to complete the deal, the more attractive you will be to an acquirer.
That means, amongst other things, comprehensive records held on a recognised back-office system, as well as a limited number of platforms and investment propositions. Lack of well-managed, accessible data will seriously reduce value and restrict potential buyers.
If you have staff, who will move as part of the deal, their records should be equally accurate and up-to-date.
6. Your team
Think carefully about the role your team will play in the deal. The acquirer will be interested in one thing post-sale; how many clients stay after the sale. In fact, so will you, especially if part of the payment due to you is contingent on client retention. A smart buyer will see through any attempt to disguise a disgruntled employee as someone who has ‘bought in’ to the deal.
The support of the advisory and administrative teams is therefore vital.
Planning ahead
Every adviser will want something different from the sale of their business; but whatever it is, you have a better chance of achieving it if you plan carefully.
That means thinking about how an acquirer will view each and every decision you ever make in your business, starting now.