The world of mergers & acquisitions (M&A) is as complex as it is varied, where everyone has a story of how best to approach the maze, what to expect from it and what might go wrong, says Louise Jeffreys of Gunner & Co. Here she explores some common myths and explains why being properly prepared is the key to successfully selling your business.
At Gunner & Co., we strongly believe that the more planners and advisers understand about the journey involved in selling their business, the better equipped you will be and the more positive an experience you can have. Around 2 years ago, we began a series of seminars, bringing together experts and advisers on all aspects of selling a financial planning business.
Through the discussions and questions arising from these seminars, it has become clear there are some well-regarded myths which are worth being discussed so that the true situation can be explained. This article aims to bust some of the most common myths.
Myth Number 1: Selling the shares of my company will leave me with no liabilities
Many owners of advisory businesses go into a sale process convinced that a share sale is their ticket to leaving behind a long tail of potential complaints from clients, and that these are simply handed over to the buyer.
Whilst it is correct that a share purchase is a ‘warts and all’ sale, to manage their risk, the buyer will ask the seller to agree to warranties to cover any future claims made by any ex-clients. It is worth remembering that those warranties may be time-bound – limiting your association – but they may not.
The breadth of the warranties you are asked to give will generally be established through the due-diligence process. Key to this is how confident a buyer is in the quality of advice which has been given, after they have ‘looked under the bonnet’ of the business. This adds time and complexity to your sale journey and, depending on the findings, can negatively affect the price paid.
Warranties don’t only cover client complaints. They may go on to cover claims from former employees, disputes/litigation from suppliers, claims on intellectual property rights etc.
Because of its importance, at our seminars we tend to include a full session on what to expect from the legal process, with experts from DWF, Cook & Co. and Herrington Carmichael sharing their experience on this topic.
Whichever route you take, having the support of an adviser who is familiar with financial services transactions is essential.
Myth Number 2: Due diligence is a huge and daunting task
Now don’t get me wrong, if you’re selling the shares of your business and we’re talking about transactions in the millions of pounds or thousands of clients, then be prepared – due diligence will be long, detailed and time consuming.
However, if you enter into an asset purchase scenario with a buyer, have a relatively small client bank and straightforward investment approach, then due diligence may not be too dissimilar from an annual compliance review – typically centred around file-checking a portion of your clients, getting an understanding of your back-office processes and systems, and understanding your accounts and income streams.
Roderic Rennison, of Rennison Consulting, speaking at Gunner & Co.’s seminar, counsels the need for business sellers to clearly articulate a number of steps. He describes these steps as knowing ‘who your clients are and how they may be segmented (in terms of client proposition and fee structures), what your investment proposition and platform strategy is, and how your client and management information is organised and stored’.
He argues that advisers going through a sale process should treat the due diligence process “as an exam”:
- Check what is being requested and, if in doubt, seek clarification
- Provide only what is requested
- Check the information twice before it is sent, to ensure accuracy
- DO NOT ‘change’ or ‘doctor’ anything
- Obtain confirmation of receipt and that there are no queries.
As with every aspect of selling your business, the more you understand in advance, the more you can prepare for all eventualities, leading to a stress-free process.
Myth Number 3: It’s a sellers’ market – I’ll sell my business easily
It’s fair to say, that as a broker with a very broad range of relationships across the buying market, I find that there are more buyers in the market than sellers.
However, that does not mean that it will be simple to sell your business, and even less so if you want that sale to be completely on your terms. The best transactions take place where both buyers’ and sellers’ motivations align. That is my job as a broker – to literally ‘match-make’ the connection. But if your criteria to sell is long-winded and, at times, frankly unrealistic, you may find you either don’t sell at all or you spend a very long time looking for exactly the ‘right’ buyer. And having only one buyer which is deemed ‘right’ puts you in a difficult negotiating position.
Every buyer has key criteria of the type of business they want to acquire, typically these are:
- Geographic location of clients
- Average client portfolio size
- Number of clients
- Ongoing advice fees
- Investment approach
So whilst there may be plenty of buyers out there, that doesn’t automatically mean they all want to buy your business.
Being realistic in what you are willing to accept from a buyer – price, payment terms, warranties etc. and genuinely seeking a win-win position for both you and the buyer, is the only way to start this journey.
Myth Number 4: All that matters is getting the right deal
Focussing too heavily on the details of the contract and the ‘deal’ can have its detriments, if all of that focus is at the expense of what actually happens after it has been signed.
All too often, sellers will focus far too much on the wedding ceremony, forgetting that what’s really important is the marriage itself.
At our seminars, Peter Craddock, Head of Large Business Acquisitions for SJP, has coined this as “questioning the why”. His lengthy M&A experience has seen many a deal lose its way after the contracts are signed, because both parties lost track of WHY they were doing the deal in the first place.
Consistently staying true to your initial aspirations – whilst being realistic – and paying attention to what happens after the deal, are all ingredients of a more successful transaction.
Understanding what happens during transition, how will clients be contacted and by whom, how much involvement you will continue to have and for how long, and managing the expectations (and the hearts and minds) of any of your team staying with the buyer, is just as important as the details of the contract.
Myth Number 5 – You won’t get your final payment
I’ve heard many a (somewhat cynical) planner state that, typically, the chances of getting the final payment due from a deferred consideration are low. Now of course I cannot speak for every buyer out there, but the buyers we work with, who are thoroughly vetted, take successful acquisitions very seriously indeed.
Many big buyers employ specialists to manage the process, from client novation specialists to due diligence experts – it’s a serious investment. Furthermore, the time spent on acquisitions is considerable – there’s no such thing as a simple deal, and doing it properly takes time and focus. And that is focus away from business as usual.
With so much investment of time and money, it makes little sense not to make the very best of every opportunity. Buyers don’t (from my experience) go into a purchase thinking ‘not to worry – if it doesn’t work out we’ll just reduce the final payment’. Those buyers working with brokers like us will focus heavily on client integration, and fundamentally the return on investment – ie on growing the business that they’ve bought and not looking on as it shrinks.
The caveat of course, is to work with a reputable buyer which, more often than not, involves working with a reputable broker.
Meet Louise and the Gunner & Co. team, along with a raft of experts and active market buyers at Gunner & Co.’s Seminar “Building Value in your IFA Business and Preparing for Exit”.
18th May, Bristol
24th May, London
28th September, Birmingham
8th November, London
