Imagine the following scenario. A lady walks into your office offering a deal; sell me your business. It is something that happens up and down the UK on a daily basis, in all business sectors and for a variety of reasons.
When a business is sold, there is usually a consideration. This is sometimes paid upfront and is sometimes deferred. Sometimes it is cash and sometimes it is shares in the acquirer.
Whatever it is, it has to represent the value of the business being acquired and be a reasonable amount for both sides of the deal.
For the seller, the consideration has to be sufficiently attractive to convince them to part with the ownership of a valuable asset. For the buyer, the consideration needs to be low enough that they can make money out of the acquired business in as short a time as possible to make that deal worth doing.
Willing buyer, willing seller, reasonable consideration and you might have a deal that satisfies both parties.
Now imagine the scenario where the buyer wants to acquire your business but does not want to give you any cash in return. Or shares. They are prepared to offer a deferred consideration which represents a multiple of your recurring revenues at an unknown date in the future, assuming they themselves are sold to another firm. In return for access to such a deal, you have to pay the acquirer a chunk of your turnover each year and also cover your own regulatory costs, and of course give up control of elements of your business including your investment and compliance processes. How does that sound?
This is essentially the deal structure being offered by Perspective, as reported by Money Marketing today. Based on some of the approaches we have received from a variety of acquirers over the past five years, it is not all that uncommon in the IFA sector. We can make assumptions about the motivations for offering such a deal, ranging from a genuine belief the cash for the sale will one day materialise in your bank account to wanting to actively deter deals until a new source of financing them is established.
What it does illustrate, I think, is that IFAs have long engaged in a great deal of “self-kidology” about the value of their businesses. There is always a lot of talk about multiples of recurring income being paid for client banks. Dig under the surface of those deals and you quickly discover nothing like that amount of cash is ever really changing hands. Combine that reality with the conditions attached to selling your IFA business and it is a wonder any adviser ever chooses to sell up or retire.
The value in an IFA business is the provision of advice and the delivery of an excellent service to clients. This comes at a high cost, so acquirers have to factor this in when they buy firms and structure their deals. £1,000 of ongoing revenue is never worth £1,000 to an acquirer once they have delivered a service to the client, however efficiently, and factored in the direct and indirect regulatory costs of doing regulated business. It might not even be worth £100 after all that.
Add to this the fact that clients are surprisingly transient. They will and do switch advisers at the drop of a hat, particularly when they get a sniff of their existing adviser selling out. This is why acquirers offer staged payments; some money upfront, some after a year or two depending on which clients have stuck around that long.
Deals also have to reflect the fact that £1,000 a year from one client is not worth the same as £1,000 a year from another client. The age and demographic profile of a client, where their assets are held, their service expectations and even their health all influence their value to an acquiring firm. IFAs with a retired client bank, perhaps with a limited life expectancy, should never have convinced themselves it was worth six (or more) times recurring revenues.
I think we are getting close to a time when capital in return for client bank deals are off the table, or at least structured in a more realistic fashion, which is unlikely to appeal to the majority of retiring IFAs. With the average age of an IFA somewhere in their late fifties, decisions will have to be made quickly about succession planning and securing value from a lifetime of hard work, because the lady walking into your offer offering a deal is no longer carrying a chequebook, but a list of promises which you have no control over being fulfilled.
Martin Bamford is managing director at Informed Choice