IFAs must build up as much value in their in their business as they can to ensure to ensure a retirement exit route
There is no doubt that for any professional it should be part of the business plan to have a retirement “exit route” strategy thought through at an appropriate time. Many IFA businesses may look at an Aim or stockmarket listing well before retirement but, for the majority of IFA businesses, that is not a feasible possibility. So what do they do?
It is vital that an IFA builds up as much value in their business as possible. By this I mean looking at building up trail (or servicing) commission and a client bank that is being communicated with and serviced on a regular basis.
When IFAs are selling a business, for the majority, they are selling goodwill and ongoing income. As we know too well, goodwill within most IFAs is dependant upon their relationship with thier clients, in many cases negligible if you leave the business. Therefore we are looking for ongoing, recurring, sustainable income.
In our response to the Sandler review, we have raised the issue of capital substance in IFA businesses. This will show through when sale values are set but the real value IFAs bring to their clients is through the advice-based solutions they supply. The challenge is to convert the value of that advice into a capital value for their business.
In my opinion, a quality network can add value to an IFA selling their business.
If I were a Countrywide IFA member, I would want to either buy from or sell my business to another Countrywide member as we will both understand and appreciate the business model. As a network, we are able to facilitate that process through our business development team and our technology support. As a large network with national coverage, we are usually able to match up willing buyers and sellers to ensure continuity of a local service if that is a priority.
All aspects of an IFA's business will increasingly become dependant on technology as we move to a 1 per cent world where providers and IFAs look to realign cost bases and the regulator moves towards e-regulation. A solid technology base with efficient sales admin and compliance processes enabling greater productivity through an end-to-end solution will be a prerequisite. Certainly, the introduction of our mi solutions technology to achieve this will make an IFA attractive to both buyers and sellers.
Networks have a role to play in this retirement and sales area. That role is one of facilitation and helping to drive value into an adviser's business.
I know that a lot of IFAs feel they would like to do a “handover” or “buyout” with their business. Basically, this means the selling IFA still being retained within the business he has sold although he or she is now effectively an employee. While I can see the logic of this, I do not believe it is always a good idea.
Much will depend on individual circumstances but sometimes you are much better having a clean break sale from the business. If your objective is retirement, it may be better to negotiate a fair price for the client base and business and allow the new owners to then run the business as they wish to run it without any possible interference or conflict.
As with any business, however, an IFA should not treat their business as their pension. Financial planning needs to be done separately and then, as and when an IFA wants to sell up or retire, they are not doing so from a forced-sale basis.
Valuation is always the critical issue as we all know that a seller values anything slightly more (usually) than a purchaser.
Tony Wood is managing director of Countrywide Independent Advisers