Put client wellbeing first
Financial advisers or short term insurance brokers who are thinking about selling their practices or brokerages should consider the potential impact of their decision on a wide range of stakeholders. Kobus Kleyn CFP® advocates negotiating these often-complex transactions in good faith and armed with enough knowledge to make the right choice. He told attendees at day three of the 2020 Financial Planning Summit, to “make decisions based on what is best for their clients, employees, families and the broader financial planning profession”. The virtual event, organised by The Collaborative Exchange.
The why and how of selling advice practices
The event’s final panel discussion, hosted by Zama Zulu, a portfolio executive at RMI Investment Managers, explored the emotional topic of selling an advice practice. Among the first questions put to the panellists was what motivated them to sell or make changes to the ownership structure of their practice in the first place? It seems there were as many motives as there were advisers in the room. Kleyn’s decision centred on his desire to de-corporatize, free up time for his family and give back to the profession. Mandy Stratfold, Director at Precept Wealth Solutions said that she had received an unsolicited offer for her practice, which she initially declined. “A sale was not something I went looking for; but once an offer was on the table and we had thrashed out the details, the deal seemed appropriate for the time,” she said.
Timing emerged as an important influencer in the selling decision. Mark Jurgens, Director at Jurgens Finance, said his decision to sell his practice to a corporate investor, and advisers in the business, made sense after devoting 30 years to building the practice. He was also nearing the ‘five years to retirement’ window and felt it sensible to prepare for this life stage in good time. Stratfold warned the audience not to conflate the concept of selling a practice with that of succession. The succession debate, and whether the transition occurs externally or internally, is something that all independent financial advisers (IFAs) must address. It is also important to consider the financial implications of the preferred succession route so as not to hit an affordability hurdle at the crucial moment.
Ensuring continuity of advice
An important consideration that emerged from the discussion is that most purchasers require the departing adviser to remain involved with the business following the transaction. “Most purchasers would like to look at a two or three year period; in our scenario we settled on three years [during which time the investors] want to see a continuation of the previous growth trajectory,” said Jurgens. Kleyn agreed, saying that a two year handover period was the minimum needed to allow the departing adviser to support the new incumbent through two annual reviews with clients that were in the business at the transaction date.
The discussion turned to how advisers could prepare their businesses for a future acquisition or merger. “You must develop and implement processes in such a way that anyone who interacts with your advice practice has a similar experience,” said Stratfold. By commoditising your advice practice, you make it easier for a prospective buyer to assess the business and, ultimately, take over the day-to-day operations. Another important consideration is to maintain accurate and up-to-date records. “My advice for IFAs who intend selling their businesses is to be prepared for anyone to walk in and conduct a due diligence inspection,” said Jurgens. You must be able to take a “what you see is what you get” approach when interacting with potential buyers.
The price versus value debate
How did you go about determining a valuation for your businesses? asked Zulu. “It is quite difficult to value our businesses, because there are a lot of variables that must be considered,” said Stratfold. A common technique is to settle on a combination of a multiple of the business’ earnings, which can be sweetened depending on the purchaser’s desire to own the business. The exact nature of the transaction introduces further complexity. You might, for example, come to a different valuation when selling your share to a business partner versus an independent third party.
Kleyn said there was a close correlation between a practice’s valuation and its client base. He suggested paying close attention to the advisers ‘employed’ in the practice to determine each adviser’s contribution to turnover and their relationship with clients. “The clients will not always remain in the practice post-transaction because they have a strong bond with the adviser,” he said. He warned that the price or valuation could easily erode if an adviser walked away following a transaction. One of the ways to ensure that the transaction beds down without incident is to engage in ongoing and transparent communications with all affected stakeholders. “You need to prevent rumours,” said Kleyn. “Communicate what you are planning, even if the due diligence process still has to follow”.
Client buy-in can smooth the process
Jurgens said that he spoke to his top 10 clients before finalising the sale. “You should, out of respect, speak to your clients to see how they feel about the potential transaction,” he said. “None of my clients had issues with it, and one or two even encouraged me; they said after 30 years in practice it was appropriate to make some changes”. It is, however, important to consider client outcomes at each step of the process. The biggest compliment an adviser could receive would be to revisit his old practice five years down the line and have an old client say: “Hey, great to see you again; the adviser who is looking after me now is doing an even better job than you did”.
Writer’s thoughts:
The valuation of a financial advice practice or short-term brokerage can be an emotive process, especially where the owner has invested a great part of his life in building the business. Additional factors that could influence the final price include the client demographics; provider relationships and nature of income streams. Do you agree with a multiple of earnings methodology as a starting point, or are there simply too many variables that detract from the valuation so determined? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.
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