Selling a business is often compared with divorce in that the financials are rarely what either party expects and, in the long term, at least one party feels hard done by, irrespective of the scale of the deal.
I recall the first business that I sold. When I hired the legal firm to represent me, their litigation partner insisted I attended an interview.
He asked if I was prepared to bankrupt my former partners if they failed to make payments to me as they fell due. I replied in the affirmative. He smiled broadly and explained that if you never intend to pull the trigger then there was no point in having a gun. I have never skimped on legal advice and, as a result, have not had many issues that were insoluble.
We completed the deal and had no difficulty in getting paid. The idea that anyone will pay all up front is unlikely in the current market. It is all about doing your homework. If you do not, you will pay the price for your lack of investigation.
As we head towards 2012, many will see the best option as either selling and retiring or moving into a different walk of life. For many, moving into sale mode needs a reality check – just why some owners believe their firm that is not RDR ready has any value is beyond me.
Recurring income is important but equally important is the profitability of the firm. For many years, six times renewal was fairly common, but that was in the days when renewal commission rarely moved away. In the last year or so, that multiplier has more than halved.
I realise that some consolidators pay more than this but they are not buying the firm so the liabilities, real, imagined or not yet fully formed (such as hindsight thematic reviews), are not their problem. If you refer to the recent papers on the RDR, it is clear that for purchases after 2012, keeping renewal going will require the liabilities to be absorbed at the same time.
If it is you who is doing the acquiring, then you need to be methodical and able to look at matters dispassionately and I would be surprised if you are totally competent to delve sufficiently to protect yourself against future problems. You need professional help. Just as we extol the value of advice, you need to recognise that taking advice is highly recommended unless you sell businesses every day.
For those who are considering or planning to sell their firm, the rise of the consolidator may for some be the very news they have waited for but does the price align with what is included and what is missing? Can you leave or are you locked in for a set period.
Even deferred deals can be poor value where you are locked in and subject to current terms. It is essential that you assess all the potential scenarios that could occur and then ask for amended terms before proceeding.
Always determine the cost of leaving and the mechanics of the sale to avoid undue heartache.
Just as buying property requires experts, so does any sale or purchase. In short, if you take the DIY route, you will find out the real-life definition of false economy. Let’s face it, none of the firms consolidating are registered charities. Caveat emptor must be your maxim. Buyer beware has never been more in need than now.
Robert Reid is managing director of Syndaxi Chartered Financial Planners