While the consolidator route can work well for some firms, many have expressed dismay at such arrangements. Early preparation is key
Business owners need to start thinking about the long-term goals for their firm at least 10 years before they want to make an exit – preferably sooner. The key question is what sort of people do you want to take over?
The succession choices for most smaller advice firms are broadly:
- Sell out to a much larger company – typically a consolidator;
- Sell or merge with another firm of roughly the same size;
- Pass the business down – or sell – to a member of the family;
- Sell to employees or younger partners, in which case new employee ownership trusts may provide the right approach.
Each option has its advantages and drawbacks, and any could turn out to be the right answer for a business, depending on the characters involved and the state of the firm.
The most popular routes, however, are selling to a large company or to the staff.
Many have been pleased to make a deal with one of the big boys, happily waving their business and colleagues goodbye and sailing off into a prosperous retirement.
The multiples of turnover or profit that are promised can look very attractive and there may be the opportunity to continue working within the enlarged company.
Indeed, plenty of advisers have done this with consolidators and it has all turned out fine. But sometimes not everything goes according to the seller’s expectations. And it is not just that some business owners can’t let go. Many of the concerns are more substantive.
There is the worry that the ethos of the buyer organisation does not mesh well with practices that have been established in the smaller firm, leading advisers to walk and clients to complain.
If the erstwhile business owner continues to live in the same community, that might lead to awkwardness with former clients and colleagues on the golf course or in the pub. Heaven forbid there should be any shoehorning of clients into investment propositions, but it is not entirely unheard of.
If staged payments were agreed as part of the deal, then second or third instalments might not materialise or be as generous as expected if clients and advisers peel off and go elsewhere.
With these concerns in mind, a business owner’s thoughts of potential buyers may well turn to partners or employees. In many cases, it could take quite a leap of faith for the owner to think that these people, who are perhaps decades younger, will one day be potential buyers of the business.
That could be a failure of the owner’s blinkered vision – it is sometimes hard for the old and experienced to discern potential in the young and brash.
But there might actually be a real gap in talent and scope for leadership, in which case the owner will need to start recruiting.
Assuming the buyers are up to the mark, it is really worth exploring the route provided by the employee ownership trust.
There are tax advantages. For example, the capital gain on the sale of the company is tax-free, although this is a saving of only 10 per cent on the gain, so it is not an overwhelming consideration.
More important is the trust structure for the ongoing business, which will provide some continuing safeguards for the seller and a viable way for the successors to own and control the firm in the long term.
I will look at some of the pros and cons of employee ownership trusts in future articles. If you want to know more now, head to the government website, where there are several articles on them, or speak to Ovation Finance’s Chris Budd, who has lots of experience with selling his business this way and now runs a course and has written a book on the subject.
Danby Bloch is chairman of Helm Godfrey and head of editorial strategy at Platforum