You see a client aged 30 and all they want to do is buy a house and pay their day-to-day bills. They have little immediate interest in planning for retirement.
Then as the kids grow up and leave home, maybe thoughts of retirement start to kick in and the client has to save like mad to have any prospect of retiring comfortably. Worse still – a businessperson who says to you “My business is my pension.”
Like it or not, most IFAs have no idea about how to retire from their own business or how to value that business. It has never been a priority and it usually creeps up on us, like most things, as we grow older. What can you do?
There are five basic options for a typical IFA business:
Sell to the other advisers within the firm, if any.
Merge with another firm.
Close for business and walk away.
We cannot cover everything here and it is vital that, whatever you do, you take tax and legal advice as early in the planning process as possible. A couple of case studies may help you.
Sales and stage payment
Case study one
We talked with a small IFA business that was looking for a sale due to the ill health of the owner.
During the process, the seller was very open and honest with information and the business affairs were in excellent order. Worldwide checked renewal income going back over four years and everything was in order.
The value of such a business would typically be two times renewals and a structure that should be agreed with the seller receiving 50 per cent up front and 20 per cent at the end of the first year, 20 per cent at the end of the second year and 10 per cent at the end of year three.
Case study two
We saw an IFA firm with two branches and the two owners retiring in 18 months. Files are in an average state but no database of clients, no records of renewals and a lot of work needed to be done.
The value of the business is nil in our opinion with regard to any up-front fees. The value is over time so it is agreed that renewals are continued to be paid quarterly in arrears for the first four years. Transparency is maintained after the sale agreement through separate bank accounts and sharing of commission statements.
Obstacles to successful negotiations
The first is probably that the buyer or seller assumes that one party must lose for the other party to win.
Without diving into consultant marketing-speak, the aim should be to get to a win-win position. This will probably involve compromises on both sides but if you can see opportunities for both sides to benefit then a win-win compromise can be achieved.
Remember, bigger deals have been agreed between bigger egos or stranger businesses than yours, so it is possible.
The second obstacle to a successful completion is where one party adopts a rigid position and so creates unnecessary pressure on the deal that can lead to secrecy, deceit and power struggles.
Again, it comes back to the situation where you must explore different shared needs, interests, fears and concerns. In any negotiation, everything must be up for compromise including amounts, time periods and such.
A third obstacle can be assumptions. As I was coached when I entered into sales, never assume as it makes an “ass out of and me”. Reduce the uncertainty by asking questions and by explaining things clearly and openly.
Finally, there is not too much point in looking at the past and trying to apportion blame for events. It is important to know the facts and understand what has happened but both parties need to focus on the future. It is important for both to build a relationship where a new opportunity for mutual benefit is created.
Checklist for buyer/seller
Plan the sale or merger well in advance.
Ensure the business administration is in order.
Expect a value based on a multiple of recurring commission but it could be structured, in some cases, as a multiple of turnover. For large limited companies, of course, it could be price/ earnings ratios Build an open relationship
Try and include the seller after the sale to help with clients.
Look for all of the risks, including the foreseen, unforeseen and hidden. Pay attention to the employees,the claims' area and risk from competition.
Be clear about what you are buying or selling, possibly through drawing up heads of terms: What am I buying? how much for? How will I manage my risk? How much help do I need from the seller?
Have a structured due diligence process looking at financials, claims' records, review work, sales profiles and general compliance records Consider loan note deals as they are convenient to the purchaser, the vendor pays tax when the loan note is redeemed. It reduces the rate of tax in most cases but it does need Inland Revenue clearance