'Six lessons I've learnt helping IFAs sell their business'

There are various ways to leave an advice business, from selling the client book — typically something a smaller company might consider — to selling the business as a going concern.

The latter is where MacNee believes he has identified a gap in the market, especially for independent companies, which is why ValidPath has developed a succession solution helping independent financial advisers pass on their business.

His work in the field has taught him a number of lessons business owners should know about if they wish to sell their company in this way, and he gives FT Adviser his top six tips:

1 Understanding the feasibility of a deal

Business vendors must understand whether the deal they would like for their business, and the buyer they are looking for, are feasible options for them.

The size of a business matters here, and in particular profitability, as not reaching certain thresholds might mean the business is not attractive to a consolidator or another trade buyer, says MacNee.

It's about understanding who the counterparty is or could be, and what they're looking to achieve

Retiring and selling the client book might be a more feasible option for smaller IFAs and lifestyle businesses.

In this scenario, "profitability is not the most important thing; it can be multiple recurring revenue", he explains.

At ValidPath, companies would need to have several hundred thousand pounds of earnings before interest, tax, depreciation and amortisation on an adjusted basis for a transaction to make sense, mainly because of how deals are structured and especially the financing element involved, says MacNee.

"If you're an adviser and you're looking to sell, you have to think, 'well, is what I have attractive to the other person?'

"Whether you're raising money or trying to do a commercial deal or trying to do an M&A deal, it's about understanding who the counterparty is or could be, and what they're looking to achieve."

2 You don't always have to have a plan

Potential vendors sometimes shy back from getting the ball rolling because of their "limiting beliefs", says MacNee. This could mean feeling they cannot engage in succession planning because they have not identified a successor.

"What we would say is well, actually it is the time to engage," he says, adding that there is plenty of help around for those wishing to move on.

Another such belief would be that directly authorised is a better framework to be bought. "I would say that's probably most likely, generally, not the case," MacNee says.

"Because any buyer primarily is likely going to be larger than you. And probably the last thing they'll want is another licence to manage, as you have to go through a [regulatory] change of control.

"If you actually thought it through, when you really took some soundings from the marketplace, you will realise that if you're going DA for that reason, it's the wrong reason to be going DA."

3 Be clear on what you want for yourself, staff and clients

Sometimes vendors are brought into a transaction because of special circumstances, such as a health issue. At other times, they feel now is the best time to get the most money for their business.

But it is important to be absolutely clear on what is most important for the business and business owner after the transaction, as this allows the vendor to move forward with conviction, says MacNee. "It's good practice to be really clear on what you'd like to achieve out of a transaction."

If it is the best deal the vendor is after, they can enter a more formal process, which is typically reserved for larger deals and can take the form of a type of "horse trading", where the vendor accepts pitches for the best deal from multiple potential buyers.

The business will need to be profitable to make the financing work, so that everyone gets what they need out of the transaction

But he cautions advisers to think about the implications of such a process. "That can be a tiring process," he says. "I've seen those processes run on for nine months, with no substantive work actually being done.

"So as a vendor you're exhausted — you've met more than 10 people, and you've had to do small talk and exchange information, and do the IM [information memorandum] and then narrow it down.

"And it can sort of drag things out and take you away from the business itself. But again, you probably only have that for some substantial size."

4 Keep your business growing

Business owners should not take their foot off the gas just because they know they will be selling or they have entered a formal process, says MacNee.

If an underwriting decision was made based on a certain profit, at the moment the deal completes, the profit should be that size or bigger, he insists.

"Probably the worst thing that you can see is a transaction where the vendor's trading has deteriorated over the period. Because then that might need to be repriced, or the underwriting might not work," he says.

5 Accept that a buyer won't want to take on too many risks

Sellers should understand what the risks are that a buyer will not be prepared to take, says MacNee.

"There can be a lot of saving time with heartache or angst if people can appreciate that," he says.

This includes an understanding that if a business is going to be run as a going concern post-sale, then profitability matters, as without it any financing, and ultimately the deal, can fall apart.

"The business will need to be profitable to make the financing work, so that everyone gets what they need out of the transaction."

Deals that collapse after months of negotiations and work are a tough pill to swallow, he says.

He tells of a vendor who, after 18 months, saw their deal fall apart after experiencing funding challenges. "They got completely exhausted because they put everything in it. There's a lot of diligence involved and expense, transactions and thinking about the future.

"And then it got pulled and now they have had 18 months of going around in circles, and they feel that business has suffered as a result.

"That's a tough situation to be in."

Consolidators typically onboard companies on to their systems and technology for several months before buying them out.

This is a form of de-risking, which allows the consolidator to check the numbers are what the seller said they were, among other things, MacNee explains.

He points to certain risks in smaller business, or lifestyle businesses, where various assets and activities, such as properties, cars and holidays are funded through the company.

"If you could wave your magic wand and say, what's the perfect scenario versus the less perfect one, then a clean balance sheet is the more favourable side," he says.

These are not issues that are insurmountable, he adds, "it just means it has to be dealt with".

"A buyer won't take risk," he adds. This means if there is a debtor on the balance sheet supporting companies or property for tax reasons, this would also need to be dealt with as part of the transaction.

Similarly, salaries that are paid in unconventional ways, or not paid as such, pose potential issues if the business is to be sold as a going concern.

"Let's say the directors aren't likely paying themselves very much, but putting in pension contributions or otherwise," MacNee says.

"In that case, if the buyer is looking to buy it as a going concern, as opposed to buying it for its clients and assets — which a consolidator may consider — then you need to have a cost structure that is sustainable."

If you have got advisers who are taking over, or clients are being transitioned from a retiring adviser, it's going to be quite difficult for them to also run your business

If a successor has been identified by the vendor, this could be a good situation to be in but one that comes with further risks, he adds.

"For example, I saw a vendor having to make a less favourable exit than he would ideally like, because the identified team in place was not aligned ultimately to what he wanted to do for them, but also, for his business and clients," he says.

"I've seen other examples where someone thought they had identified successors, but actually, the identified successors were talking to us about setting up their own business. So you have to have that kind of conversation early."

6 Have your numbers ready and leave ample time to transition

Anyone wishing to sell a business must have their house in order. This includes having all the management information and accounts up to date and available.

"People are going to want to see your account, your vendor accounts, your [profit and loss statement], see your contracts, your staff contracts, commercial contracts, understand the liabilities," says MacNee.

"If you're DA you've got your retail client agreements. So just having it all kind of ready to go will be quite impressive to a buyer. 

"And at some level it is about having a connection there as well. [You need to understand] what the narrative is for the person who has to make the case internally. And all else being equal, if a firm has their stuff together that does look good," he adds.

He says for almost every buyer, one of the most important things will be that the starting position of the entry is as they expected. And if a vendor delivers that, they will be in a pretty good place.

Once the deal has completed there will typically be a handover period, managing the client transition to the new owner.

Transactions can take a long time to put together and involve a large amount of work, but it is important to prepare for what happens after the deal, says MacNee.

"I think it's very important to provide an ample time for the transition," he says.

"And if you have got advisers who are taking over, or clients are being transitioned from a retiring adviser, it's going to be quite difficult for them to also run your business, [so prepare how you will be onboarding those clients and over what timeframe]."

There is never too much time and planning that can go into the process.

carmen.reichman@ft.com