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Martin Bamford: Are we seeing the death of cash deals for advice firms?

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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

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. Martin

    Essentially you are right, but you could have said it in a couple of sentences:

    Most (so called) acquirers are cowboys. Either men of straw with empty wallets or just plain sharks who prey on the desperate or gullible. Yes there are some genuine and decent guys out there, but they are not easy to come by and are as rare as rocking horse manure.

    I would make the following additional points:

    For youngsters like you – for heaven’s sake do what you advise your clients to do. Then when you finally want to bow out you won’t have to just rely on selling your business. It is a sad reflection that so many in our business have failed to do that.

    See if your employees would like to do a buyout. You should be able to judge if they can raise the mustard and if they are capable.

    Don’t have inflated and unrealistic ideas of what your business is worth. What would you pay for it?

    By all means be flexible in negotiations, but don’t be steamrollered.

    Start early if you are minded to sell up and see as many potential acquirers as possible and do your due diligence as thoroughly as possible. Yes – you check them out – down to where they buy their knickers.

    Hope that helps someone somewhere.

  2. Most clients use an adviser because of the trust and respect that they have nurtured for one another over the years, if you decide to sell, that building of trust and respect has to start again.

    If the first impression does not meet that clients expectations or in any way questioning whether he or she can work with that person, that client will walk.

    Making the client bank and the business worthless.

    The only consideration to succesion planning should be to encourgage younger people into our profession, teach them, nurture them and gradually phase them in with your clients. That way you know that your clients are looked after and you will exit the business on your own terms.

  3. @ Plan Works

    I agree.

    Martin please note 🙂

  4. I agree with Plan works too, hence why i have a 24 year old who has his level 3 in mortgages, R01, R05, just doing ER1 and R04 (next month) and a 21 year old who has her CF6, sitting R01 next month and then moving on from there. They will take on their own clients as soon as qualified up to 15 years older than them and be there for my clients when I retire I hope…….It will be the business structure they will pay to buy my out overtime I would hope as I wind down, but at 49 1/2, thats a long way off yet and we’ll need to be lining up their successors well before I retire too!

  5. @ Plan Works

    That’s what we’ve done too (over 5+ years). And speaking for the second generation in our firm, so far so good.

  6. I would entirely agree.

    I have been saying for many years now that even if cash is available that selling for a capital sum is like buying a decreasing temporary annuity (because you never get the cash in one lump). Far better to simply enter an arrangement whereby you retain a good proportion of any recurring income – more akin then to a conventional and longer term annuity!

    Nexus IFA has taken on numerous exiting/retiring advisers in this manner. A debate can even be had on how entrepreneurial relief can still be benefitted from despite the arrangement not being a cash sum payment. That makes the annuity feel even better !

    As a one liner – why convert your business’s regular income to a sum that will have absolutely no possibility of being reinvested to then convert it back to income – a simple case of maths.

  7. @Ian McIver

    What and effectively sell your business on the Hire Purchase. If you want to sell your business it usually follows that you want to bow out. Who says that you want to reinvest the money? That pre-supposes you have not built up any other assets.

    What do you think other businesses in other sectors do when they sell out. I sold out of a manufacturing business many years ago. If the purchaser would have had the temerity to suggest paying on the drip he would have got a very tart response.

    I suggest you refer to my comments above – second paragraph.

  8. I haven’t had any experience of buying or selling a business so i can’t comment on the pro’s and con’s but being in my early 30’s i look forward to all the competition retiring. 😉

  9. @NIck

    Spot on. You’ll be going long after I’m pushing up daisies. It’s the old mantra:

    It’s not enough to succeed – others must fail – or expire!

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