Six myths about selling your business

David Hesketh, group M&A manager at Perspective Financial Group, unravels the misconceptions about selling your business.

When you are in the business of acquiring IFA firms it is important never to underestimate the enormity and importance of the decision the owner or owners are making. We meet individuals and look at firms that are often in a state of, if not confusion then at least uncertainty about the best way to go about selling. It is an atmosphere where questions are constantly being raised about what it is right for the owner, the clients, the employees, etc.

Thrown into the mix, and often given particular credence, is the owner’s own understanding of how a sale will be convened. These can be based on rumour and/or misconceptions and it is these ideas which often put a spanner in the works. Many of these thoughts are out and out myths about the purchase process and it is probably helpful to all IFA firm owners who are considering selling their business to place them into their true context.

Myth 1

‘My practice is much more valuable than your valuation because…’

There are many things which practice owners think add value to their business but in reality don’t. For example, the following are components of an IFA practice that hold little or no value from a purchaser’s point of view, however the vendor often believes different:

• Recurring income generated from legacy clients where there is no service provided and no client agreed remuneration. As a buying business we place much higher value upon recurring income where there is client agreed remuneration and an ongoing service provided.
• A client bank that does not generate revenue. A list of names and addresses has no value regardless of how ‘high net worth’ they are.
• A business plan prepared by management to increase turnover and profitability which management cannot demonstrate is achievable.
• Historic levels of recurring income and profit that management cannot demonstrate are maintainable.
• Turnover which is expensive to administer and ultimately generates no or a low level of profit.
• Assets such as properties and motor vehicles. We would always require a practice to sell such assets pre-deal (often to the vendors personally).
• Assets such as intellectual property and intangible assets.

The true reality of the situation is that profit levels and tangible recurring income, for which there are client agreements in place, are the two primary figures on which value can be based. Anything else is quite frankly superfluous to a consideration of value.

Myth 2

‘I am interested in selling but the process is bound to take too long for my needs.’

The reality is the whole process, from start to finish, can take as little as seven weeks, although we would usually suggest vendors allow around 12 weeks. That’s three months to get everything completed.

Clearly there can be bumps in the road which mean a longer process is necessary however given this is likely to be one of the most important decisions an owner will make it pays to make sure everything is correct. The fact is that, if we do agree to purchase your firm, it is in all our interests to make sure the deal completes as quickly as possible.

Myth 3

‘I suppose if I sell to you, you’ll come in and change everything?’

Many firms anticipate wholesale changes once they’ve signed the business over; there is an assumption that an acquirer will want, and need, to dictate how the business is run.

Again, in terms of the way we operate, this is a fallacy. Our proposition is based on keeping the management team in place for as long as they wish to maximise the profitability of the business. It is true to say there are some acquirers that will dictate what products, platforms and providers the firm adopts but there are also options, such as ours, whereby they can maintain the autonomy of their business.

Myth 4

‘So if you’re not involved in my business 24/7 I’m not expecting a lot from you post-acquisition.’

The assumption here is that, if the consolidator doesn’t control every minute detail of how the business is run, the firm won’t receive the level of support it wants or needs. In this circumstance, the owner may well think, what’s the point in being part of a larger organisation?

We believe there is a difference between a hands-off approach, whereby support is provided on the acquired firm’s terms when needed, and a dictatorship, where procedures and control is forced on the business from head office. Some firms may wish to cede total control however most I have come across don’t; they want support to continue operating coupled with the added benefit of a significant player behind them.

Myth 5

‘Once I’ve sold my business there’s no way I’ll be able to earn good money.’

Again, a good acquiring business will reward performance and growth, enabling the owner to share in the growth. The two-year earn-out for our vendors is predicated on targets being hit; if they are surpassed they will receive a greater payout.

Myth 6

‘I suppose you think whoever gives me the most money, gets my business?’

Finally, this is a myth that acquiring firms would do well to think about. If all vendors simply wanted to maximise capital return then the process of buying a firm would be a lot simpler. In reality, although most vendors naturally want to get the best return for their business, many will also be actively considering what is best for their clients and what is best for their staff.

Ultimately, if everyone is aware of these considerations it can make the whole exit strategy process less guided by speculation and ultimately less stressful. And that can only be good for all.