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Contract countdown

IFA companies looking to sell up before the RDR need to take action now as buyers want a two-year earn-out period

Make no mistake about it, we are all in countdown mode at present.

I am talking about the new RDR environment for IFA firms which kicks in on the first day of 2013 and leaves all those working within the industry with the best part of 26 months to get up to speed and ensure they are compliant.

On the face of it, just over two years seems like ample time, after all by then we will have witnessed and waved goodbye (in purely sporting terms) to another Rugby World Cup, a European Football Championship, not forgetting the small matter of the London Olympics.

However, in the perhaps slightly less glamorous world of financial services, the fact is that things are never that simple, particularly when to put off crucial decisions or to wait in terms of implementing them could make a rather significant difference to advisers, owners and the firm itself.

Perhaps then the sporting analogy and the curious case of Wayne Rooney is not such a different one to that of the IFA market.

Essentially, we could view the start of the RDR as the beginning of a new contract, with the old one running out in 2012. Much like Rooney did not wait until the end of his current contract before making a decision – albeit after a spectacular U-turn – IFA firms must not wait either.

The fact is that if your firm is not going to take up the offer of the RDR contract, then you must decide now and you must have a clear idea of what you do want to do, come 2013.

For IFA firm owners, the timescale towards RDR becomes even more pressing if they are looking for an exit strategy. This is due to a number of issues, not least working out the aims and ambitions they want to achieve and finding an acquiring partner that can best meet them.

It takes time and effort in terms of research to do this but as the months roll on there is also a financial carrot in acting decisively.

As an IFA consolidator, our own model of acquisition is based on a two-year earn-out period for the owner.

Generally, they receive 50 per cent of the acquisition price up front, followed by 25 per cent at the end of year one and 25 per cent at the end of year two, with either profit or recurring income targets needing to be hit in order to receive the final 50 per cent. We generally prefer management to stay in place during that period so those looking to make their exit before the end of 2012 will have to make decisions quickly.

For those who say, why would the two-year earn-out option be better for my firm, the answer is simple – there are lower risks for us as a buyer and therefore a greater sale price can be agreed.

For firms which move into 2011 and beyond and still want to be acquired, the fact is their potential sale price could fall.

There are a number of reasons for this, not least because our own work to ensure the firm gets up to RDR-compliant standards has to be undertaken over a truncated timescale. This will require greater effort and investment, which will be reflected in the price we are willing to pay for a business.

The simple fact is that a two-year earn-out period established before the end of 2010 is going to deliver much more value to the firm’s owners than waiting six, 12 or 18 months before agreeing to acquisition. We are reaching the limits of that two-year period already but this is not to say agree-ments cannot be reached relatively quickly and there is nothing to stop, at the least, initial contact and talks being conducted as soon as possible.

The analogy with Manchester United and football clubs in general seems to hold true for IFA firms – the longer they leave their decision to sell a player, the less they can expect to receive. It is something to think about seriously as we move towards the end of the year.

David Hesketh is M&A manager at Perspective Financial Group

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