With a raft of high-profile advisers selling their businesses in the past eight months, advisers are waking up to the idea of succession planning, growing recurring income and putting all important processes in place to ensure a good deal when it is time to sell up.

A group of Citywire readers said they did not have a succession plan in place but they also did not have their heads in the sand. Most of these advisers said they were in the process of making changes that they hope will make their business more attractive.

 

‘To do’ list

Top of the ‘to do’ list is increasing recurring income which has become the valuation du jour. Steve Champion (pictured), business coach and founder of Inspired Consultancy Services, says that recurring income not only produces a high business valuation but makes your business process more robust.

‘There are two valuation methods that stand out. There is the valuation on the net profit but the problem with that is the owner of the business often gets paid after that figure so it’s not a realistic figure to use,’ he said.

‘The focus is now on recurring income and the average multiple is about three. There are loads of mergers and acquisitions going on and lots of deals are being done on recurring income.’

For those working on a commission basis, moving to fees can take between one and three years although he says he has completed it in six months for one firm.

Simon Roberts of Foinaven Asset Management said: ‘We have been more focused on fee generation and fund based renewals and have increased these.’

He believes that recurring income, turnover, net profit as well as client potential need to be considered when valuing a business.

Brian Sweeney, national business consultant for Pivotal, agrees with Champion that recurring income was the most realistic valuation for small firms and that standard accounting principles were best for large companies. But he warned principals of small firms to make sure that their businesses are independent.

‘You have to make sure that you are selling an independent firm, meaning that the firm is independent of the principal,’ he said. ‘If the firm is built on the reputation of the principal then when that person leaves they are taking out value from the business.’

Stringent processes

In order to make sure the whole business is profitable advisers must put stringent processes in place and use systems that can be easily absorbed into another firm.

Carole Nicholls, principal of Nicholls Stevens in Bristol, has acquired six firms, her most recent being Gill Cardy’s Professional Partnership which she took over in January.

When buying a business she looks at recurring fees and an established client base which generates lots of referrals.

‘Overall you have to feel that your business fits with the one you are buying otherwise it won’t work,’ she said. ‘I value a business on recurring income because at worst the recurring income is all you are going to get. You can’t guarantee the clients are going to stay or that they will give you any more business if they do stay.’

She warns about taking on a very old client bank and says that those doing family wealth planning are attractive.

Staying on

Although Cardy did not join Nicholls business to transition her clients, many advisers are choosing to stay on in an advisory role once they sell up.

Mike McCroddan, managing director of The McCroddan Partnership, this month sold to Conforto Financial Management but negotiated the sale of his business separate to his own buyout package. He will stay on at the firm for the next three years on a salaried contract as private client director.

Champion said that this is not uncommon practise with large firms on the acquisition trail. ‘The larger groups, like Thinc, are looking to acquire quality businesses in which their systems can be replicated quickly. They want to keep the clients and also keep the financial planners. Often these firms offer a figure for the business and then negotiate a separate deal for the owner who will get a salary and often a final payout,’ he said.

Of 25 Citywire readers contacted, nearly half said they expected to stay employed for two years after their business was sold, slightly less said they would stay for one year and a handful expected to be employed for three or more years. The most popular age to retire is between 60 and 65.

Thinc has snapped up three high-profile financial planners since November last year, including Julie Lord, Marlene Shalton and Mike Godfrey, all of whom are now employed by Thinc.

But most advisers said they believed that you resign your independence if you sell to a life company-owned adviser business. Cardy said that she would not have sold her business to a life company-controlled adviser.

‘If a company is prepared to give you a lot money for your business, and money is what you need then you go with it. Business people have to do things that make economic sense and you cannot play mother to all your clients, they have built their business and are selling it as a business decision,’ she said.

She said that a series of coincidences and market timing pushed her to sell but warned advisers that there will not always be someone to buy.

‘One of the flaws in IFAs is that they assume someone will want to buy their business although they are not making it buyable,’ she said. ‘I never assumed that someone would want to buy the business because it was just me and you have to do yourself out of a job, there was always the thought that there wasn’t a market for my business.’

Sweeney said that the credit crunch would affect advisers’ selling opportunities and that large companies with ready cash would snap up an increasing number of small businesses.

‘The credit crunch will reflect in the price of adviser businesses and people will be prepared to accept a knockdown price. If you are a company with money in your pocket you can negotiate a better price or negotiate in another way, such as how long the principal stays on,’ Sweeney said.

 

Steve Champion's Top Tips Increasing business profitability and the basis of his adviser health check. Clear and attractive client value proposition supported by good marketing. A Managed business plan to show you are hitting performance targets. Structured and profitable service and pricing structure with segmented clients. A defined organisation structure with supporting roles. Effective, efficient and documented systems and processes. Outsource anything that is not your expertise. Ensure strong recurring income is being generated.