The financial advice profession is approaching a turning point at which many advisers are expected to retire, but only half of small business owners have an exit plan, according to ValidPath chief executive Angus MacNee.
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.
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."
