There’s never been a better time to sell a financial advice business! There are over 150 actively acquiring firms that I know; most of which are fuelled by Private Equity money from the US. In fact, we appear to be in a bit of a goldilocks zone at present!
However, not everyone wants to sell out to a consolidator. For some, ensuring their clients continue to get the amazing service and independent proposition that the business was built on is their number one priority. For these advisers, selling to a member of staff (often called a Management Buy Out) could be the perfect way to pass on your business to someone you trust; be that a family member who works in the business, an employed adviser, or another senior manager.
If you’re thinking of selling to a self-employed adviser, take a look at our ValueBoostÒ framework!
Here are 5 essential considerations when considering a Management Buy Out (BMO)
1. Decide on what you want
As is true with any sale, the most important step is to take some time to think about what you want from the sale. It’s easy to think “money” but there are a lot more variables to consider than you might realise. Here are a few to get you thinking:
· What profile of payments would you want? 50% upfront and then 25% at the end of year 1 and 25% at the end of year 2? Are you prepared to wait longer for pay-out so the buying adviser doesn’t need to come up with so much cash on day one?
· What will the buyout be based on? Probably number of clients paying ongoing service fees, but what about market movements? What about clients who make withdrawals for personal reasons?
· Over what period are you prepared to continue to be involved? Do you want to disappear as soon as the sale completes or are you prepared to stick around and help with the transition?
· If you are staying around, will you be employed and receive a salary or is it part of the buyout deal?
A successful MBO relies on you (the seller) working out what you want and what you’re prepared to compromise on BEFORE you start negotiations with the buyer. Once the conversation with the buyer is underway, it’s easy to lose sight of the bigger picture as you’ll often be drawn into the details. Having a clear idea of what’s important to you before you start will save headaches in the long run!
It's also important to work out what you’re going to do once the sale has completed. Holidays are great and can last a few weeks or even months but have a think about what you’re going to do when that holiday mentality wears off. Hobbies, volunteering or maybe even starting a new business are ones I’ve seen. Having something to move towards will make it easier to disengage with the business you’ve spent your life building.
There are several ways to finance an MBO, however in almost all instances, the buyer will need to put in some personal financial contribution towards the deal as well as any external funding. This gives them some “skin in the game” and tends to focus the mind towards making the deal a success.
The most common source of funding is a bank loan to buy the shares of the owner. This is usually taken by the buyer but will require good credit and often personal assets to act as security. The loan payments are generally made by the company from profit.
An alternative is that the business can take out a loan to fund the purchase, however this will very much depend on the businesses past, current and projected future performance and also the credit history and assets of the buying directors. Often personal guarantees will be required, although some specialist lenders may (at a higher interest rate) be willing to forgo personal guarantees.
Private equity could be a source of finding for the MBO, however, if you are looking to sell to your team rather than a consolidator, it’s unlikely that this would be a good option as the PE funder will usually make demands on the business in terms of earnings targets and potentially the way the business is run.
You could opt for a Seller or Vendor Loan. This leaves some of the money due to the seller in the company in the form of loan notes, which will be repaid over time. In effect, the pay-out can take longer than the typical 2-3 years, giving the business more time to generate the funds to buy the business by repaying the loan notes. The same considerations should be made here on personal guarantees by the buyer or by taking security against corporate assets.
Of course, if the buyer has substantial personal wealth, they could always complete the deal without any financing, however in reality, this is very unlikely.
The best way to finance the deal will generally need a conversation between seller and buyer and take into account personal circumstances. If you’re not sure which way would be best for you, speak to a specialist rather than guessing or going with the obvious!
3. Agree the details - contract is king!
When selling to someone you know well, it’s easy to work on a gentleman’s (or gentlewoman’s) agreement for some of the details. There’s a temptation to just get the main points in the contract and just “work together” on the practicalities, however whilst you may think that your colleague and successor would never do anything to your detriment, when money is involved it’s surprising how many of these handshake agreements can be forgotten.
The key here is to spend time discussing and agreeing on the details and putting them into the contract. The contract protects both buyer and seller by clearly listing everything that has been agreed to and if there are any disputes in the future, it’s the contract that will ultimately decide who is right and who is wrong.
If the situation under dispute isn’t specifically covered in the contract, it’s one viewpoint against another, which is when lawyers step in to argue on your behalf, legal costs can start to get silly, and friendships become unrepairable.
As humans, we programmed to think that bad things won’t happen, however the size of the insurance industry shows us that they do. It’s worth trying to cover as many situations as possible in the contract so that if the event occurs, there’s no argument about how to handle it.
4. Reposition your story with clients
Most businesses have been built from humble beginnings, attracting clients by the good name and reputation of the owner (and adviser). Whilst this was very beneficial in building your business, it can be detrimental in retaining clients post buyout.
If you’ve been at the centre of your business’ story for the last 10 years, clients can find your exit unsettling and may use the opportunity to ask their friends who they use as a financial adviser. Most deals are based on the level of ongoing service fees, so a reduction in client numbers is going to reduce the pay-out.
To reduce this risk, start to change the story you tell your clients to move the focus away from you and towards the value of financial planning. You may already think that you’re not regarded as being that important, however a lot of firms include considerable information about specific individuals in marketing. This could be biographies / ”what I did at the weekend” pieces, regular market commentary from an individual, using photos of yourself or staff for marketing literature.
Now is the time to move the focus onto the firm as a whole and how it is being a client of the business that has helped clients, not the work of any individual.
Humans are social by nature and want to “be like others” so why not use examples of how some of your clients have achieved their goals based on advice they received FROM THE BUSINESS. You’re more likely to retain clients during a buyout if they feel like they are a client of the company rather than the client of an individual.
5. Make sure everything is in order
The smoothest handovers are those that have been planned well, with work going in up front to make the business as easy as possible to take over. But that’s the buyers problem, right? You need the business to be successful to finance your residual payments so it’s in your interest to make the business as easy as possible to run, leaving the buyer to focus on generating revenue to meet your buyout payments.
The best to do this is to think of your business as a franchise like NFU Mutual or McDonalds.
Imagine for a second buying a McDonalds restaurant as a franchise but when you arrive there’s no operating manual. Everyone knows what a Big Mac is but what’s the process required to make one? How long do you grill the patties and at what temperature? How many squirts of burger sauce are needed? How does the ordering system work? What about the tills?
Whilst a financial advice business most certainly isn’t a McDonalds restaurant, a lot can be said for having the franchise mindset.
The person you’re selling to may have worked in your business for years, but do they know the things that you do? Do they understand income reconciliation for a multi adviser practice? Do they understand the PI renewal process? Compliance oversight? What about CIP construction and ongoing research? Incentive schemes?
To make the handover as easy as possible, work with the buyer to document all of your processes and procedures, just like you were turning your business into a franchise. Documenting your processes will make taking over the running of the business much easier for the buyer, and by spending time looking at your processes, you’ll often find previously overlooked efficiencies.
Documenting the technology you use, and how you use it, is as important as documenting your processes. In the modern world, technology is at the core of every business. Having the right technology in place and using it correctly can be the difference between a good and great business. Again, by working with the buyer to review the technology the business uses, you may find that you’re using multiple systems where one would do, reducing costs and making life easier for everyone.
Lastly, get rid of any skeletons in your closet. If you have any ongoing client or supplier issues or situations you feel could become a problem, try to resolve them before concluding the deal. Contracts normally include warrantees protecting the buyer if these types of situations occur so it’s normally better for both parties to resolve them before the sale.
Whilst each MBO will be different, if you consider these 5 points, you’ll have a much better chance of a successful deal where both parties are pleased with the outcome.
If you’re thinking about an MBO, or any other form of exit, get in touch. We’re happy to talk things through with you (without charge) to help steer you towards the right path for you!