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Selling an advice business
M&A — April 21, 2016

Selling an advice business

Recent research suggests around 30% of advice firms will be for sale in the next three to five years. If this turns out to be correct, somewhere in the region of 1800 firms may change ownership, leading to somewhere in the region of 8,000 advisers working for new employers.

For most business owners the decision can be filled with uncertainty and emotion relating to concerns about what will happen to employees and clients. This is the first of a series of five articles looking at the sale process, from initial consideration to life under a new owner. The articles will provide high level guidance on key points to be considered at each stage.

There are a number of reasons why you as a business owner may decide to sell or merge, including:

  • retirement
  • a lack of scale leading to pressure on profit 
  • buoyant valuations
  • succession readiness
  • ill health or family circumstances

The reason behind your decision to sell can determine how long you have to prepare. In certain situations, the timeline may be outwith your control. But if time allows, at least two years should be spent preparing employees and / or family members for the transition.

The first step is to define your objectives. If you have other shareholders in the business, it is likely that you will be discussing your thoughts with them as you will all have to be aligned on the following points:

  • when you want to exit
  • your own personal circumstances and what happens post sale – do you remain working, or leave
  • who you sell to. Can you sell to your business partner, a management team, your family – or will it have to be a third party? Are there any buyers you can immediately rule out?
  • the terms you are willing to accept. Are you willing to accept an earn-out as part of the offer, would you like all cash upfront (in which case a discount to valuation may apply), or would you be prepared to accept cash and shares?
  • what will happen to the employees or family members and should anyone be considered for a wider role post acquisition
  • what will happen to your office and premises if you own them?

By defining objectives early, you can establish the terms you are willing to accept. This saves time when engaging with potential buyers as you may have key requirements a buyer is unwilling to accept.

The second step is to understand where the value lies, and to what extent there are gaps between where the business is today and where you would like it to be. These gaps should be mapped against the objectives and used to form the basis of the transition plan which could include:

  • simplifying your business to improve profit
  • developing a five year plan to deliver growth (knowing what you think you can achieve post sale will help with structuring an earn-out should it apply)
  • if you are seeking an early exit, planning for transition of tasks to others within the business
  • identifying (and where possible eliminating) risks and liabilities
  • determining how you will message the strengths and risks within your business
  • collating management information and preparing a draft information memorandum and a presentation that you can use as a basis for discussion with interested parties

At this point you may also give consideration to who else should be involved in the process. This could involve employees, a mentor or an independent third party. Consideration should be given to how you communicate your plans internally. Do you want to keep your plans quiet, or do you decide to be open with your staff to avoid uncertainty? Hearing about your plans from external sources could be unsettling for the business.

It is also helpful to record the characteristics of the type of business you would like to sell to. Think about what you would like to preserve, but also what you are willing to change. Create a list that you can use as part of your discussion. Sellers often want to leave a legacy defined by the treatment of their clients and employees. In our experience, this often matters more to business owners than how much they receive for the value of their business.   

Before entering into the sale process, there are a number of points worth considering and these are as follows:

  • the sale process can be very timing consuming, impacting business performance. How will you ensure that performance remains on track?
  • every business is different and your business might be worth more or less than another which recently sold, so attempting to draw direct comparisons can be misleading
  • focus on what really matters – price isn’t everything, but if it is you might need to make sacrifices to maximise the sale value of your business
  • only engage with potential suitors when you are ready. While a broker might tell you that now is the right time to sell because values have peaked, good businesses usually attract a premium to fair market value. Engage when the time feels right for you
  • be willing to accept and discuss the difficult issues in your business. Once acquired, fewer surprises will lead to fewer problems during integration and beyond

So these are a few points to be considered during the early stages of exit planning. In the next article, we will look at how you can find the right buyer. 

(This article also appeared in New Model Adviser, 8 September 2015).

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