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How can adviser firms attract potential buyers?

by: Maria Merricks
  • 19/08/2010
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How can adviser firms attract potential buyers?
With up to a quarter of IFAs expected to leave the industry in the run-up to RDR, Maria Merricks finds out how advisers looking to sell their firms can attract buyers.

Over the next 18 months, a mass sell-off of adviser firms is expected, as advisers gear up for RDR and MMR implementation and thousands quit the world of financial advice for good.

Commentators predict as many as a quarter of advisers in the UK will leave the industry before 2012, rather than meet the proposed requirements.

This will lead to tough competition among firms looking to sell. So how can advisers ensure they stand out from the crowd and achieve the best price?

Selling points

Simon Chamberlain, CEO of financial services consolidator Succession, says a firm’s recurring income (trail, renewals and fees) is its most valuable asset, and a business model encompassing this is key.

He says: “Without an adequate recurring income, the company is not worth anything. This point has been proven around the world. There is no demonstration on record of any purchase being made based on the quality of an adviser, only the recurring income.”

Damian Keeling, managing director of consolidator Perspective, agrees. “We look for a pretty decent recurring income and, although not a major concern for every buyer, a perfect business for us will use a platform. More and more buyers look for this, and firms doing so will stand out from the crowd.”

Keeling says using platforms makes a firm appealing from an RDR perspective: “Being RDR-ready and offering clean compliance is extremely valuable and should not be underestimated. All buyers will want to know any details of any complaints, ever. So ensure you are prepared for this.”

Bradbury Hamilton managing director Sheriar Bradbury says it is imperative that a new owner knows where to find robust and accurate client data: “Having an efficient back-office system is key. Paper-based files and poor records will no doubt affect the value of a firm,” he says.

Industry commentators concur that a solid client service proposition is a firm’s main appeal. Chris Baigent–Reed, head of client engagement for 1st Exchange, says a common problem is how to replace the advisers in the business:

“If you are essential to the business, the business is worth very little to a third party. It is your client service proposition and the objectivity and impartiality of the thought process behind it that is the key differentiator. This needs to be supported by a robust structure,” she says.

Shaping up

She believes the most efficient way to address a buyer’s requirements is with quality client data, and a firm’s value may be compromised if this is not robust and comprehensive.

“Over time, databases can become cluttered with duplicate or obsolete data,” she warns. “It is well worth cleansing your data and making use of any aids such as bulk merge or deletion services within your customer relationship management (CRM) system, combined with expertise and advice from your technology supplier.”

Indeed, such systems will not only adhere to a buyer’s need for an ‘RDR ready’ business, but will also systematise essential recurring income figures.

To present this most effectively, all forms of recurring income must be established and offered in the simplest way possible and emphasis should be put on future profit potential.

“Management reports, produced by your CRM system, are invaluable when illustrating income and profitability broken down by adviser or introducer,” says Baigent-Reed.

“Workflow systems will also illustrate which tasks are performed by whom and show how tasks can be matched to skillsets. The firm can optimise efficiency by removing tasks from the adviser that can be carried out by an administrator or paraplanner, thus freeing the adviser to provide more profitable advice to clients.”

Valuing the business

Although advisers should expect to value their business on a multiple of recurring income, with such a large range of figures up for discussion, IFAs should not depend on this, warns Steve Hagues, managing director of Retiring IFA.

“There is much comment in the press about multiples, but IFA businesses can differ so much from one to another that such guides are of little use,” he says. “For example, if an IFA business derives 60% of its recurring income from three octogenarians, it is less attractive than one which derives the same amount from 30 young professionals.”

The key point to remember is the real value of a business lies in what it can do for the acquirer, he says.

“The key to realising the full value of your business is to gain exposure to a good number of qualified buyers. If a business is genuinely attractive to a potential buyer and fits ideally with what he wants then normal multiples of income of turnover do not apply.”

With this is mind, expect each buyer to vary in their valu­ing approach. Ultimately, work towards the idea that the more boxes ticked, the higher value of the firm.

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