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IFA sellers beware

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

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. paolo standerwick 31st August 2010 at 3:31 pm

    I agree in general with the above points. Liabilties aree a no no for purchasers, but assistance in the long term with complaints handling would be an attractive deal for the retiring IFA as rules constantly change.

    However, if buyers and sellers are dishonourable then anything you may do to protect oneself maybe futile anyway. Problem here is most IFAs are small producers with small amounts of renewal income, so employing lawyers is just another way of someone else getting a slice of that small cake.

    A purchase and sale agreement checked by a good solicitor should suffice in most small cases as honourable buyers and sellers will always produce a good deal for both parties.

  2. So now, to all intents and purposes, our businesses are nearly worthless because no prospective purchaser is going to buy the trail with unknown liabilities in the future.

    So you can’t sell your business for more than fifty quid but you’ll be stuck with the consequences of any future hindsight reviews until the day you’re laid six feet under. Christ, what will they think of next?

    Another FSA knife between the ribs of the IFA sector. If it wasn’t so damned pernicious, you’d almost have to admire the FSA for all the mechansims they devise to come up with to screw us.

  3. It is the old FSA Mantra

    Exterminate
    Exterminate
    Exterminate
    EXTERMINATE

    Then go work for a bank as a reward for growing their market share!

  4. “it is clear that for purchases after 2012, keeping renewal going will require the liabilities to be absorbed at the same time.”

    Wonder how that will work ? No TOB , no fact find, no advice given, never even met the man and yet I would be liable simply for receiving renewals ? I don’t think so.

  5. Anon IFA screwed well and truly 1st September 2010 at 1:32 am

    (Part 1) I sold my IFA Business a few years ago to another much larger unscrupulous IFA practice. They came up with all sorts of excuses not to pay up and eventually after months of wrangling and changing the figures only paid me half the money they owed me. They used every nasty trick in the book not to pay me and changed the multiples over and over again(downwards) My client base was active and had been meticulously maintained and diaried for compliance and future business opportunites all on 1st Software etc. They were little more than crooks and made all sorts of trumpted up false accusations about my breaking small clauses in the agreement (which I didn’t) as an excuse not to pay up.

  6. Anon IFA screwed well and truly 1st September 2010 at 1:33 am

    (Part 2) Even when I threatened legal action I knew that they could keep me wrapped up for years in legal jargon and allegations of broken clauses. Astonishingly they are still practicing and buying other IFA’s client banks, so for anyone thinking of selling a client bank make sure you seek legal advice first as Michael Walter advises. There are unfortunately , no ‘gentlemens agreements’ out there and there are some firms who will steal your clients and take you for as much as they can. I may still report them to the FSA and our other IFA bodies, but I suspect they will not be interested in spending unnessesary time and resources standing up for the principles they hold so dearly but that this other firm have so sadly broken and have left me to pick up the pieces. Am I bitter, the answer is yes.

  7. Apart from anything else, is it legal for the FSA to intervene in the terms of sale of a private business? I guess that doesn’t really come into it, given that the FSA completely disregards UK Law and has statutory immunity from prosecution. Who but a body of persons intentionally and maliciously anti-IFA can have possibly thought that giving the FSA statutory immunity from prosecution can possibly have been a good, not to mention just, item of legislation to put on the statute books? All it’s achieved is to give the FSA carte blanche to ride roughshod over anything or any body which dares to stand in its way, and if you don’t get out of the way you get trampled underfoot like some tiresome and inconsequential insect.

    Yet Hector Sants would have us believe that the FSA (fsa.gov.uk) is “entirely independent of government”. If that’s the case, then how can the FSA justify using at every possible opportunity its statutory mandate to act outside the laws of the land by which the rest of us are bound? The answer, of course, is that it doesn’t even bother to try.

    What kind of nation is this in which we’re living and trying against all odds to make a living?

  8. @ Julian Stevens – I admire your prodigious output of FSA-bashing. It really is something to behold.

    It is not the actual purchasing of assets/shares that the FSA is prohibiting – as you quite rightly point out this is contrary to basic UK law. What they are doing is making the purchase of assets only less attractive and trying to encourage share deals.

    Why is this a good thing? Well because it will stop businesses avoiding taking on liabilities when making an acquisition and leaving a shell with no means to meet any redress arising should it be necessary. The clients get stitched up, more loss of faith in the industry, FSCS eventually meets the claims and our fess go up as a result.

    Asset deals may well reduce the value of any transactions but share deals ensure any seller gets rid of any potential liabilities that may arise in the future (subject to warranties and indemnities that can’t exceed the consideration anyway) – this surely is a good thing for sellers? Would you accept a lower price for surety and peace of mind?

    Also, this will stop all those opportunistic acquirers who think they can grow with no risk. If you want the clients, then buy the clients in full.

    I for one am fully behind the proposals.

  9. To: Anon IFA screwed well and truly | 1 Sep 2010 1:32 am

    Do you have a contract?

    Did you take legal advice before signing that contract?

    If not, did you at least purchase a copy of our “Buy Sell” book?

    If none of the above apply, what do you expect?

    There are some really dodgy firms out there!!

  10. Anon IFA screwed well and truly 5th September 2010 at 7:17 pm

    To Evan, I suppose that naivity played a part in what happened. It just beggars belief that the firm concerned are mean’t to be a trusted IFA dealing with large amounts of client’s money. If they are prepared to rip off a fellow IFA, what else are they capable of doing to a client for money ?? and yes there was a contract but no I did not take legal advice, so yes, I expect to be ripped off then by a supposedly well respected, industry colleague. I do not trust anyone any more, unfortunately. Definately get legal advice first.

  11. Overall I had a good experience when I sold my practice. Although it was a bit of a rollercoaster, I was greatly helped by Jack & Pat at IFA Client Sale, who helped me keep my cool during the end part of the negotiations – when things could have become frayed. I received a good price, albeit staged and the buyer and I are still on speaking terms! Not all stories end badly. Yes, CAVEAT EMPTOR always, but it helps if both sides have the correct legal support, and intend to work together during and after the transaction. Good intent is priceless!

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