Moonstone Monitor: Selling or buying of broker practices

Chris de Burgh’s song “Don’t pay the Ferryman…” came to mind when a broker enquired about determining the fair market value of his practice. This question keeps cropping up in correspondence and calls from readers, for a number of reasons that include:

• The intention to sell the business
• Ensuring that your life partner is not taken for a ride in case of your untimely demise
• Where you have an agreement with someone to buy your business in case of death or permanent disablement
• For estate planning purposes

Determining a value is as easy as catching the Southeaster in Cape Town, putting it in a bottle and painting it blue.

Anton Viljoen, a reader who approached a big broker house regarding his short-term business was given the following formula: Gross commission over the preceding 12 months X 1.4. If your gross income amounted to R350 000, they would offer you R490 000. Fifty percent is payable upfront and the balance after 12 months.

This may be a little too simplistic in the event of a once-off sale, and in Anton’s view not a fair reflection of what had gone into building a healthy business over many years.

There are at least four or five methods employed by auditors in an effort to determine a fair value, but all of these will deliver different results. This is of course due to the vast number of variables involved in the calculation.

What should the seller look for in a potential buyer?

• Reputation and standing in the community
• His experience
• Number of contracts, and with which company
• Retention of clients over time
• Is the buyer FAIS accredited and Fit and proper?

And conversely, what should the buyer be on the lookout for?

• The same as above plus
• Potential risk associated with bad business practices
• Status of compliance of the business
• Realistic growth potential of the investment
• Alternative revenue streams from the client base

This list is of course endless, and then there are still other factors to consider.

The risk can be mitigated by buying the “book” rather than the business. Buying a business, including the license, can have future implications that need to be addressed at the time of the sale. This could again have other implications, e.g. P.I. cover and FAIS liability. In the case of a one-person business, of course, there is no option other than to buy the book.

My colleague in the legal division has vast experience in the drawing up of contracts and warns against spending a vast sum of money on buying a business and then not making sure that you have as tight a buy-and-sell agreement as you can possibly get. This should include items such as restraint of trade conditions and safeguards against possible pre-contact misdemeanours. There may also be some nasty surprises in terms of the FAIS Act.

I have put off for more than a year trying to write an article on what is obviously an extremely complex subject. What appears above is by no means comprehensive and I sincerely trust that our readers will share their thoughts, suggestions, experience and advice on this subject with the rest of us. Please respond directly to me at pkruger@moonstoneinfo.com.

Next week we will discuss an alternative to selling your business that may be far more beneficial in the long run