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.