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Matter of principals

If you are in the process of acquiring another practice, then there are important issues to consider. The author of The Business of Advice outlines the pitfalls you may have to confront and explains how to avoid them

The pace of buying and selling is increasing. If you are in the process of acquiring another practice, then there are some important issues for you to consider. These issues include:

  • Confirmation of what you are purchasing
  • Final valuation and method of payment
  • The timing and process for amalgamating the businesses.

This article will deal with the first two of these.

Experience shows that financial issues often dominate the negotiation process. However, at some point before you agree to go ahead, you will have to take a step back and ask the following questions (see the table below).

Finally, you must take expert tax and legal advice throughout the process. This will add to the expense of the deal but this is not the place to cut corners.

Even if you have dealt with the method of payment in principle, then you must confirm the agreement in writing so that both parties are clear on what is to happen.

After agreeing on the basis of the valuation, you can move to the method and timing of payment. There are no fixed answers because these arrangements have to reflect the financial position of the two businesses and, in many cases, their principals.

You must confirm the agreement in writing so that both parties are clear on what is to happen

The following few examples that I give cover the circumstances that are the most likely to occur.

Example One: Full integration of the businesses with the Principals remaining with the new business

If the Principals of the acquired business are all joining the new enlarged company, a large proportion of the payment for their business will be in equity.
They should have standard contracts for their ongoing roles as directors and advisers. The equity share will incentivise them to integrate their business and work to grow the new company.
There may be a cash component of the payment which is not likely to exceed 30 per cent of the agreed value.

Example Two: Acquired business runs as free-standing unit with the principals remaining

In this case the arrangements will differ. Payment will be in two parts, with a mix of cash and equity as an initial payment when the deal is struck (typically with the bias to equity) up to 50 per cent of the agreed value.
The remaining payment will be linked to business performance, typically over the following three years as an incentive and ensure the parent pays no more or less for the stream of profit it has acquired. This payment is typically made in terms of equity.

Example three: The principals retire, or decide to leave the business

In this case, the principals could expect to receive up to 50 per cent of the value in cash as the deal is struck, with the remainder of the sum to be paid over three years, ideally from the recurring income of the acquired clients.
But there are often variations around these examples that I have listed here and it is very important to adopt an approach that works for the circumstances of the sale, as well as one which suits the personal position of the individuals.

David Shelton is the author of The Business of Advice, which is published by Tax-briefs Financial Publishing . Find out more at www.businessofadvice.co.uk

THE DEAL

Are we buying all the company? Can we structure the deal to leave liabilities behind? Have we taken advice and understood tax implications for all parties? What risks would negate the deal’s financial benefits? Can due diligence identify all potential risks?

INFRASTRUCTURE

What capabilities does the acquisition bring that we lack? Can we manage across multiple sites if the acquisition stays in its current location? What genuine economies of scale can we secure? Are we clear on IT infrastructure and how compatible it is with ours? Has the firm processes from which we could benefit and vice-versa?

PEOPLE AND MANAGEMENT

Will we get two cultures that destroy what is good for both businesses? What commitments do we take on advisers and staff and clients? Have
we decided who does what in the new management team? What is our plan for retaining key people? If people are made redundant, will
responsibility lie with the existing owner?

CLIENTS

What is our plan for keeping key clients? Can we make sure that they are fully integrated into our business? If we cannot deal with the lower-value clients, will we lose them?

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