As the advice profession looks to the future of its businesses, IFAs are considering selling to their own staff as a way out of the succession dilemma.
There are a whole host of options for passing on firms, from family succession planning, selling to a major network, consolidating with another IFA, or handing a firm to its own staff.
Each brings its own range of issues, however. How should client books be sold, what would a potential buyer look for? How is market value best determined? What exit strategy ultimately benefits the seller?
Last week, former Ovation Finance owner Chris Budd sold his Bristol-based business through an Employee Ownership Trust (EOT), opting for a model that allows staff to have control over the business without directly owning shares.
He says: “I didn’t want to sell to a consolidator. I want the business to continue doing its work in helping clients use their money to find happiness. I like our clients and I’m proud of our employees.”
EOTs are an increasingly popular business set-up, with benefits including better staff performance and reduced absenteeism. The structure also avoids problems
when selling business shares directly to employees, for example if not all staff can afford to buy-in.
Budd says: “They would have the same problem of selling their shares one day. I have therefore been embarking upon a plan over the past 10 years or so to make myself the least important person in the business. The owner gets a way out, the employees get a way in, and the clients not only continue being serviced by the company, but a company whose focus is not on maximising short-term value.”
The technical transition from advice business to EOT involves establishing a new firm, the EOT, into which shares are sold and deferred consideration for employees eventually becomes available.
Retiring IFA founder Stephen Hagues says selling to staff means leaving your firm with owners who can see real value in it, and are confident they can get more value out of it.
If the handover isn’t done properly clients walk or advisers walk with clients
He says: “If there is an opportunity to sell internally, the advantage is that high level of trust when you’re already working with someone and the due diligence is done. Employees have a much clearer reality of the business than any other buyer could possibly have.”
Tax reliefs that ease the burden for employees who do acquire shares directly are a consideration when structuring how a business can be sold.
Hagues says: “The real grey area is when someone wants to work for another five years, but is locking in a deal and a structured exit from an early point with a guarantee that their firm will buy them out.”
Now chairman and a minority shareholder of his firm, Budd suggests retiring IFAs should also consider how they want to stay involved in their firm.
Hagues says most retiring senior advisers tend to stay involved, which also works as a benefit to clients. He says: “If the handover isn’t done properly, clients walk or advisers walk with clients.
A lot of value is to be added if the adviser stays on in a symbolic or ambassadorial role, and it is great from the clients’ perspective if the retiring principal is still contactable through the business via email or similar.
“It doesn’t involve a lot of effort or time from the retiring adviser to keep an eye on how things are ticking over. Usually that is in their best interests too.”
Hagues says a major drawback to selling your IFA to your staff is costs involved on the seller side and weighing up the proper value of your firm.
He explains: “The downside is affordability because the more people involved in the deal, the less likely it is to be successful. The question can be how much less you’re willing to take if you sell internally rather than putting your business out there on the open market.”
Budd says finding a solution that will not leave either side of the party with additional financial strain is a crucial factor in a well-designed exit plan.
He says: “The final step in this sale process is to find an ownership structure that allows me an exit but does not place a burden, in the form of debt, on others. That means the business also needs to be structured in a such a way that it will continue to be profitable, at least for the period of earn out, and preferably for ever.”
Hagues says the handover period, which can range in time from one or two years to more than five, should be carefully considered.
He advises: “In order to hand over a business correctly, there has to be a long transitional period which is essentially a job in itself before retirement. One of the main problems with mergers and acquisitions is trust, so working with people that already know you, trust you and like you is a good idea.”