There are few financial planning firms today that are officially and publicly for sale. There are, however, many principals in financial planning firms who are in a serious state of flux. Before contemplating whether or not to buy or sell, principals should consider the following:
Develop a strategy
Whether buying or selling, you must develop a game plan. Determine what you want, when you want it and how much you’re prepared to pay for a business or for how much you want to sell. Consider how to go to market, what assistance you will need and what your strategic position is.
Preparing to sell
Create a ‘virtual data room’ containing:
* Three years’ financials
* Client segmentation
* Client service matrix
* Organisational charts with job descriptions and CVs
* Full client list to facilitate compliance client file selection
* Past and current compliance reports
* Complaints register
* Funds under management analysis
* Business plans
* Office manual
* Licence/s and lease details
* Software summary
* Marketing material
* Lists of referral sources
* New business activity summary.
A buyer needs to have explored, if not sourced, finance and considered ramifications of an acquisition. Being able to articulate the ‘value proposition above cheque book’ is essential.
Get real
The seller needs to obtain an independent valuation of the business. This should provide a range of prices, employing several methodologies to establish a realistic range.
The buyer also needs to have seriously considered the duration of transition period post-sale, whether they will stay on three months, one year or seek ongoing part-time employment.
Buy/sell tips
* Commit sufficient time to explore an acquisition or realisation.
* Get professional help early, develop a strategy and accept advice.
*Establish what is and is not negotiable.
* Be flexible.
* Communicate with all stakeholders effectively and in a timely manner.
* In most deals, price is not the most important issue.
* Leave the lawyers until the deal is agreed.
* Plan to make a good business great.
* Assess the past, evaluate the present but plan the future.
Business as usual
Both parties need support to ensure business continuity. Personal discipline is required to ensure that the focus is not diverted too much from normal business operations.
Too many sellers ‘emotionally retire’ at the signing of contracts when significant outstanding payments are determined by performance after 12 months.
The seller must be an advocate of the buyer and vice-versa. This underpins the need to establish, from the earliest possible point, cultural alignment and mutual respect.
Communication strategies need to be developed for both pre and post-transaction for both parties.
Flexibility
For any deal to be successful, flexibility is required. Often a buyer can feel they paid more than they should or the seller may feel they have sold for less than true value.
Price is but one factor, flexibility on a wider range of issues such as timing, transition, continuity of staff and ongoing roles all contribute to a satisfying deal.
Risk analysis
Confidentiality agreements need to be signed at the earliest possible stage. Due diligence across financial, commercial and legal issues should be carried out early in the proceedings.
It is the future entitlement to the ongoing revenue of the business that is usually being bought or sold, thus there must be a high degree of integrity and confidence attached to the financials.
A significant risk is ‘business interruption’. If a buyer proposes to integrate the acquired business within their own, then many issues will need to be considered. A new business plan, including marketing and cash flow management, must be developed to further reduce risks.
The bottom line
To avoid deals falling over because the goalposts are moved during negotiations, work with your business adviser in an open and frank manner to establish what the bottom line really is.
Deal-breakers can be around issues such as personnel, timing, future roles and price. To avoid conflict, create an inventory of non-negotiable items. This will ensure you will not enter negotiations with the wrong party.
Timeframes
A purchase or sale should be managed like any other important project. Timeframes should be created and monitored. All parties should agree to the timeframes and commit to them to ensure the process gets to a ‘go’ or ‘no go’ scenario expeditiously.
The more protracted the negotiations, the less likely a transaction will be satisfactorily concluded. We contend for the average business, a duration of six to 12 weeks from search to completion is very realistic.
Legal advice
Legal advice is essential, however, we strongly recommend this should not be sought until negotiations have been largely concluded — lawyers can become ‘deal-breakers’ instead of ‘deal-makers’.
Lawyers are there to draft documents that reflect what has been agreed. Allowing the lawyers to influence the intent or ‘the spirit’ of an agreement will significantly increase the chance of failure.
Future vision
Most sellers will experience ‘seller remorse’ given the significant changes envisaged. This can be a subconscious hurdle to overcome, which is understandable given the business is about to be handed over (to a virtual stranger), usually after many years of sole control.
Seller remorse can be overcome when there is confidence in the purchaser and in the seller’s own future.
If the seller is to retire, significant lifestyle planning needs to have been undertaken. The sellers must be able to look positively to the future of the business without themselves at the helm. The buyers must plan for the future and accept the fact that this will be one of the greatest challenges of their careers.
Project management
Being faced with anxieties of how much needs to be done can be intimidating, however, this can be offset by a project management approach. While it is important to have and maintain the ‘big picture’, it is equally important to break the project down to digestible pieces. Effective communication and time management is essential, as well as having the appropriate resources.
Advice from the pros
Use of an experienced business adviser will enable a transaction to be negotiated smoothly. Business advisers should have extensive networks and specialise in their field. Their skills should enable outcomes to be successfully negotiated in order to protect the interests of all stakeholders.
The adviser must be able to work with staff, dealer group, due diligence teams and other professional advisers. A business adviser should substantially increase the likelihood of success within workable time- frames. Fees, references, processes employed and timeframes should be discussed prior to appointment.
Case Study
SellerBuyer
FUM$50m $45m
PlatformYes Yes
LicenceOwn Own
Recurring Revenue$415 $400
Age of Business15 yrs 12 yrs
Staff4 4
Key IssuesEarly Retirement Growth
Health Funding
Client welfare Synergy
Daughter’s future
as a financial planner
Outcomes
* Six weeks from start to finish.
* Purchase price 2.65 times recurring revenue = purchase price of $1.1m. EBIT times 4.25.
* 40% upfront, balance (60%) 12 months, subject to revenue retention including a 5% rise and fall adjustment.
* Daughter – offered long-term employment contract and mentored.
* All staff retained for three months and one is now general manager for whole business.
* Client transition – no fall-off, cross-selling occurring and increased revenue.
Alan Kenyon and Steve Prendeville are the directors of Kenyon Prendeville, practice transition specialists.
