View more on these topics

Making a timely exit

There has never been a better time for the owner of an IFA to consider selling up, writes Peter Allen, partner in Grant Thornton’s Financial Services Group

Exiting from the business is one of the most important decisions that the owner of an IFA will make, both for the company and their own personal financial position.

There has rarely been a better time for the owner of an IFA, or indeed any insurance intermediary business, to consider selling. The market, and valuations within it, are being propelled by two factors.

First, insurers are keen to enter the intermediary and distribution business – partly for strategic reasons, in order to get close to the ultimate customer and therefore the ultimate creator of value, and partly in order to offset declining margins in risk assumption.

Second, consolidators, often financed by private equity, are very active in the market and although capital supply may be constrained by the credit crunch in the medium term, in the short term, the Chancellor has probably given the market a boost by moving the capital gains rate to 18 per cent, which will encourage early completion of deals.

Careful and timely planning is essential to ensure the successful continuation of what the IFA entrepreneur has built, to maximise the value of the business at exit and to protect the amount of wealth that ends up in their hands.

The IFA’s greatest single asset is naturally the people and, in particular, the individual advisors. No sensible buyer will proceed without a spread of business among advisors within an IFA, because otherwise the post-deal temptation to accept a better offer elsewhere may be just too great.

Already having a succession plan in place is often important, especially for the older vendor. A strong senior management team that is capable of steering the business after sale is key to any exit route. Indeed, it may be that team which provides the owner with exit through a management buyout.

This is a possibility the owner may wish to explore early on as the team will need time to prepare their proposition and talk to sources of finance.

At present, valuations seem more buoyant for trade deals than MBOs but this can change rapidly and without warning.

Vendors who give sensible thought to exit a few years before retirement will have time to effect any operational changes to the business that may be necessary to maximise its value.

If a management buyout is not on the cards, exit will almost certainly be via a trade sale. Vendors sometimes need to be reminded that beauty is in the eye of the beholder, rather than the desk-top valuation of an observer, and the value of the business will be determined by the level of interest it generates in the market.

Key value drivers that are of particular importance in the IFA sector are:

  • Scale. A lot of IFAs are very small and the frictional transactional costs can easily impact a sensible valuation.
  • Quality of people in depth, not only the advisers but also finance and compliance staff being particularly interesting to a discerning buyer.
  • Regulatory robustness. We are currently often spending more time during an IFA due diligence exercise on regulatory matters than any other issue and sometimes more than all other issues put together. Buyers do not want to value a business highly only to discover that hundreds of thousands of pounds needs to be spent in remedial action on misselling issues.
  • Fee income more than commission income and trail income rather than initial commission although valuations underpinned only by initial commission are commoner than they traditionally were.
  • Robust operational and financial controls.
  • A clear sector focus on growth markets, both geographically and sectorally. For many trade buyers a spread of geography is not helpful because it impedes sensitive integration with existing portfolios.
  • Brand, culture and reputation.
  • Management flexibility regarding involvement following the deal.

Sensible vendors appoint professional advisers early on who can work alongside them during this crucial period as there will be key decisions to make as well as a numerous housekeeping chores that will take anywhere between two and 12 months to implement. Positioning financial statements to best advantage, getting operating locations to look their best, establishing adequate systems and controls, addressing any regulatory issues, confronting pension issues are the most obvious.

An business adviser will be able to advise on the extent to which an auction process can add genuine value. Sale prices are usually (although not always) maximised by a disciplined auction but it can irritate buyers and senior staff, thus destroying value post-sale, and sometimes imposes costs on the vendor – in particular vendor due diligence.

An advisor will also help the vendor think through the implications of a deferred consideration structure, both from a commercial and tax perspective.

Sensible vendors take good early advice on their personal tax position. Unsurprisingly, IFAs are usually alive to most of the major issues but they will only sell their business once and the resulting wealth needs to provide for retirement so careful advance planning is imperative.

This is all the more important in a political environment where the capital gains charge can go up by 80 per cent without warning.

Finally, we always counsel vendors to be prepared for this to be one of the most challenging times of their life. The demands placed upon them by the sale process cannot be over-emphasised (but are almost always underestimated by owners).

In addition, they have to keep the business operating at peak performance throughout as nothing can damage value, or dent the confidence of potential acquirers, more than a blip in profits part-way through the process.


Paper chase

Before I wrote last week’s column on the way New Labour managed to squander the goodwill of millions of people by its arrogant refusal to listen to those who had sensible, constructive ideas to make about financial services, I had actually intended to write about something else.

Driving forces for change

Norwich Union is to call on the FSA to abandon proposals for primary advice. It is also suggesting that the qualification bar for professional advisers be set at diploma in financial services level and it wants customer-agreed remuneration to apply across all channels, including bank-based advisers.The views will form the financial services giant’s final submission […]

Broker Talkback

Was the pre-Budget report good for your clients?No 62%Don’t know 38%No “It was a farce because those IHT arrangements could have already been in place for the sake of a couple of hundred pounds. The capital gains tax changes were reasonable. Overall, I was not inspired by it at all, though.”Mark Parks, Mayfair Independent Financial […]

Suffolk sets up Sipp deal

Suffolk Life has launched a trust-based Sipp product which will allow customers to self-invest protected rights money.The firm’s existing trust-based Sipp will be closed to new business from November but customers will be able to remain in the Suffolk Life Deed Poll scheme if they wish.However, they will have the option to transfer into the […]

UK Equities: looking past short volatility

By Mark Martin, head of UK Equities, Neptune With markets facing numerous challenges this year, Neptune’s Mark Martin, manager of the UK Mid Cap Fund, and assistant manager Holly Cassell explain how they look past short-term volatility to focus on maintaining a strong long-term performance record. Read more here Important Information – for investment professionals only. […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm