Creating and realising value in the IFA sector can be an extremely stimulating and rewarding activity, particularly in such a changing market with significant and major opportunities for growth.
As the race for growth and business consolidation accelerates, many IFA companies, both big and small, may be looking for suitable acquisition opportunities.
Buying a business can be a successful significant step forward but get it wrong and it can turn out to be disastrous for the acquirer.
Identifying a suitable business to buy is the first stage and the research put in at the outset will certainly pay dividends further down the line.
Once a potential target has been identified, ask a series of searching questions such as:
Is the management quality good and will there be continuity if required?
Does the business make a reasonable profit and is there scope to increase that further?
Are the quality and sustainability of earnings good and can they be enhanced?
Does the business have a sound, well managed risk management culture?
Is it well run with a good admin infrastructure?
Where does it add value to your existing operationsand do you have the management time and resources available to integrate the target fully?
Based on your price expectations, what are the targeted returns on capital?
Having established that the target may be suitable, let us examine the various stages leading up to an eventual purchase, bearing in mind that the pitfalls tend to be similar, regardless of how big the target business is.
Essentially, there are six main steps leading to a successful outcome:
1: Identifying and approaching the target business.
2: Initial discussions with the decision-makers.
3: Heads of agreement, including an exclusivity period and confidentiality undertaking.
4: Conducting legal, commercial, financial and compliance due diligence.
5: Negotiating the purchase, including the price and any indemnities required.
6: Settling the purchase on completion.
From the outset, your aim should be to encourage the vendor to want to sell the business to you. It is helpful to establish your credibility by formally registering your interest in buying the business, explaining why you are interested and how you intend to finance the purchase.
Do not forget to build a good relationship of mutual trust as your integrity and future plans for the business are key to making the purchase work post-acquisition.
It is essential to ascertain that the business has no major problems and thus preliminary due diligence must be carried out prior to making a firm offer for the business.
Getting a feel for the business
Research its market, its client base and main competitors. Visit the business, ask questions and judge whether key information may be hidden.
It can be very useful to quietly ask those who are likely to be aware of the business to give an overall impression of the firm's reputation and capabilities.
It is also important to choose professional advisers with appropriate experience as you may well need experts in several different areas at the various stages.
Specialists in market res-earch, accounting, tax and legal due diligence as well as the financing of the purchase and negotiating the transaction could play an important part, as will those who can advise on HR and employee terms such as pension fund provisions.
Ask about the previous deals that the professional advised on and speak to a few of their clients about their experiences. This approach should quickly reveal which advisers are good at adding value and you may also pick up useful tips on buying a business.
Making an initial offer
Take professional advice to help you value the target business and think carefully about how you are going to improve profits. Buying the business is only half the equation. You need to plan how you are going to run the business if the purchase is successful.
Make your own profit projections. Do not rely on the vendor's figures, for example, question claims that the gross margin is going to increase.
Identify where savings can be made and where there is scope to increase profits. For instance, could your existing business also grow by selling to clients of the target business? This could apply in specialist areas such as investment management and tax planning.
Consider your acc-eptable level of risk, bearing in mind that the level of risk is higher if the target business:
Has assets worth less than your offer price.
Relies on a small number of major clients or key employees.
Is currently unprofitable or has a history of losses.
You may have to fund losses for some time to come. Heavy borrowing to finance the purchase will also increase risk. Conversely, the lack of adequate finance may have been all that was holding the company back. Calculate your initial offer and your maximum offer taking into account your initial valuation range and any competition you may be up against.
The vendor's objectives
It is common for initial offers to be low, with the expectation that the vendor will then insist on a higher price. With this in mind, leave room to improve your offer if necessary.
Once you have established the terms of purchase together with the price structure, it is good practice to formulate a “heads of terms' agreement setting out the main terms of the sale. Providing your due diligence checks have been thorough, you should now be in a strong position to close the deal, with many more to follow.