Finding the right buyer is a complex process for sellers of advice firms, and often many unforeseen issues arise during the process. In this article, we look to provide an overview of the types of buyers active in the advice market - and what their strategy and objectives mean for business sellers. We will also look at options relating to the sale process.
Being clear on what will and won’t be acceptable post sale will help determine the type of buyer that may be best suited to you. Each type of buyer will assess and value your business in a different way with different terms and conditions attached. Understanding this before engaging with potential buyers and being clear on what you are willing to accept will save a significant amount of time.
Buyers active in the advice market today fall into four categories: i) financial buyers, ii) strategic buyers, iii) other individuals within your business (management buy-out) and iv) new shareholders who could access shares in your business through an initial public offering.
Financial buyers can be self funded, backed private equity firms, or listed. (A number can be found on AIM). These businesses are normally referred to as “the consolidators”. Where the buyer is backed by a private equity firm, it is likely they will be working to an exit horizon and aggressive targets.
This could be for example five years from the point of the initial capital raise but will vary depending on market conditions, the scale of the opportunity or the financial performance of the business.
Financial buyers look to maximise the value of acquisitions in a short period of time. They are looking to increase business performance, and reduce costs. Often they may only be looking to acquire a client bank (assets), as opposed to the business (shares).
To achieve their goals, attractive terms may be on offer as part of an earn-out and it is not uncommon for half to be paid upfront followed by two further payments. The value of these payments is usually linked to stretched improvements in business performance. (Although in some cases, the buyer may offer the seller 100% upfront linked to an immediate exit from the business to save on salary and dividend payments).
Shares may be offered as part of the deal terms. This can introduce a significant amount of risk to how much is eventually received. The seller may have no choice on the date of the share sale. Business valuations at that point could be high or low, or an unforeseen event (such as an S166) could alter the risk profile and valuation metrics of the business leading to a fall in value.
With shares, it is also possible that the seller may receive more than had been initially forecast. As financial advisers know, the value of investments can go up or down with shares held in a single entity sitting at the riskier end of the scale. If shares are on offer, sellers should have realistic expectations on what they might receive. The shares may also be illiquid and it could take longer than initially planned for the value of these to be realised.
Strategic buyers take a different view. They are typically looking to acquire a business that will provide entry to a new market, or allow them to increase the scope of their capabilities in an existing one.
We have seen a number of recent examples of this taking place among wealth managers, stockbrokers and private banks that have acquired high quality financial planning firms. They have acquired these firms because they recognise that to protect their margin, they have to deliver a broader planning proposition to clients who are paying more attention to the cost of investment.
Strategic buyers often look for ambitious management teams that are capable of delivering change and growth in the medium to long term. Investment in the business may be part of the terms to support organic and inorganic growth. The value of the earn-out and long-term incentive plan (which could include shares) may take this into consideration.
To maximise value, the buyer will often look for several aspects of the business to change. This could mean moving to a restricted model operating a single platform while adopting the new owner’s investment proposition. The risk for a strategic buyer is that the advisers in the firm don’t support the change and leave.
Buyers can also from within. In most cases, we find that business owners favour the management buyout option as it provides continuity. However, there are two challenges. One is funding. Often the individuals who may like to acquire the business are unable to access finance. The seller may be willing to sell their shares over a longer period of time, but there are risks.
The second challenge is whether or not the person or individuals who would like to acquire the business have the necessary skills. `This is a common issue in small and mid-sized firms where it can be difficult to justify time and investment in the necessary training and development required for effective succession planning.
The last option is to float the business. Recently we have seen a number of businesses take this approach by listing on AIM. Their primary motivation is to raise capital for acquisitions. The business owners can sell their shares but this has to be carefully managed as selling shares on AIM where trading volumes are lower, can lead to fluctuations in the market capital of a business.
So sellers must decide on who they would like to sell to and prepare the business accordingly. Each requires a different approach due to how a buyer will view and value the business.
There are different routes to finding a buyer. Firms can approach a broker. Some act as a ‘matching service’ while others will support the seller from beginning to end. Sellers can also identify potential buyers through their own network and make a direct approach. Sales representatives from platforms and life companies tend to know who in their local area is looking to acquire.
But the key point is to know what you are looking for. Without a clear view on the type of business you would like to sell to, you may end up spending too much time on the process. While it could be a valuable learning experience, it can also be a distraction that impacts business performance.
(This article also appreared in New Model Adviser on 19 October, 2015).