As the economic climate shows no sign of a recovery (in the short term at least) I think increasing numbers of IFAs will be thinking of selling their practices in the next two to three years.
With so many macro factors coming together at the one time, there has never been a time like the present.
I read recently that 60% of IFAs are only FPC level qualified and the average age is 55, you don’t have to be Chartered to work out what will happen once the FSA bring in Diploma level requirements.
Also, the TCF project is really causing issues in some firms, as the wide reaching remit is forcing them to introduce more and more systems and controls to justify their commissions when previously they have been able to operate with a simple transactional model.
The really obvious and arguably the greatest factor is the state of the economy. Recent events are already causing problems for some firms and if a full-blown recession hits, things look set to get a lot worse.
Should IFAs be affected by any of these events and be considering selling, it is important to start thinking about just how much their practice is worth.
Interestingly, people often don’t consider the most important questions facing them in this situation i.e. how do I maximize the overall price paid for the business; how do I ensure the clients are looked after; and how do I make sure I get paid the money I am expecting from the deal?
For those IFAs contemplating selling a practice, there are a few golden rules to follow in order to get the best deal:
1) Work out how is needed for the deal to be viable
At Bradbury Hamilton we have spoken to over 1500 IFAs in just under 15 years regarding the possible sale of their practices. A common theme is that the vast majority of IFAs have no idea of what they need to achieve from a sale or any real idea of what the business is worth. A potential purchaser will generally be more enthusiastic in talking to a seller who has a real idea of what they want to get out of a deal.
2) Speak to a number of people about a potential purchase of the business to get an idea of what it may be worth
Another common misconception is speaking to the ‘local IFA’ only as a would-be purchaser. In my experience IFAs tend to talk to the IFA down the road that they have known for years. Whilst this method of selling a business gives people comfort because they know the person it does not necessarily secure the best or most appropriate deal for their business. All too often these arrangements are based on a ‘gentleman’s agreement’ without really looking around to see what other offers may be out there.
3) Make sure any deal agreed is confirmed with an appropriate full contract
Always use a lawyer who has experience of drafting such contracts and read the contract thoroughly (boring yes but worthwhile). Remember, being tight when forking out for legal fees you could mean a heftier price later if something goes wrong.
4) Check the purchasing firm is on a sound financial footing to look after existing clients
Take reasonable steps to check the purchasing firm will be in a position to honour the agreement. In the current market especially it is pointless agreeing ongoing payments- if the purchasing firm goes under, it could leave the IFA with nothing. Likewise, if clients are not looked after properly, they may leave and the IFAs income could stop.
By following these simple steps IFAs will give themselves the best chance of making the right decision.
Sheriar Bradbury, managing director Bradbury HamiltonIFAonline
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