In our September 2013 blog, we touched on the issue of practice valuations.  Our message was simple.  If you want to have half a chance of selling your practice at historical valuations, then give buyers want they want.

That mantra rings louder today, and not for the reasons most pundits put forward.  The recent FoFA farce has undoubtedly heightened awareness of the uncertainty over the sustainability of earnings in wealth management businesses.  Greater uncertainty leads to an increased awareness on the part of buyers to ensure they are getting sustainable value, and to not overpay.  But FoFA is a side show compared to the real issue.  The real issue for any vendor is whether prospective purchasers see value in the whole package – business fundamentals, sustainability, and most importantly, the integrity of the seller, at a time when the efficacy of advisers is being tested.

In this blog, we explore the whole package and urge potential vendors to walk with us in the shoes of the purchaser.  Make no mistake.  Buyers have an agenda and will act rationally in their own interests.  But the buyer’s interests are usually remarkably similar to those of the vendor.

Now let’s walk around the rooms of your business in the buyer’s shoes.  Let’s take on a buyer’s agenda while we look at the whole package and what’s top of mind for a rational buyer that is prepared to pay a premium price for a business that fits their agenda.  After all, that’s what vendors want.

The Fundamentals Suite

Strong fundamentals and the headline financials are top of mind for a buyer.  These aspects put the business “in play and in the normal price range”.  They include proper compliance, good governance, a history of profitable trading and some reasonable prospects for growth.  Even if growth is challenging in today’s environment, at the very least, buyers will want reassurance that there is no likelihood of unusual business run-off.

The Sustainability Lounge

A sustainable business and high quality earnings will put a business into the “strong interest, top end of the price range” category.

Sustainability is evidenced by deep client relationships, a “corporatised” approach to establishing and managing those relationships, a sensible and commercially sound client offer (not materially over or under priced) and minimal exposure to commissions or conflicted remuneration (or at least a clear “migration” plan to eliminate these within a reasonable timeframe).

The Integrity Wing

In this day and age, the seller’s integrity counts for everything.  Consumers are rightly becoming more discerning, the media is bringing the issue into sharper focus and it’s becoming the “walk-away” issue for prospective purchasers.

Business dynamics and deal terms that go to the heart of the buyer’s take on integrity include

  • The seller’s willingness to ”deliver” post-sale, evidenced by their agreement to a cohesive and co-operative plan for transitioning clients to the buyer’s value proposition and a sensible “at-risk” component of consideration
  • The seller understanding that viable and sensible non-competes for vendors are appropriate, and that the buyer has a right to expect that there will be strong restraints on vendors and their employees in relation to client poaching and solicitation.

The call to action for sellers is simple.  Shape and market your business to match the buyer’s agenda. Take a co-operative rather than a combative approach to the business transition and associated deal terms.  This is not subservience but rather a route to a “top price”, happy clients and clarity regarding on-going roles and obligations.  The alternative is clear – a compromise on price or simply, no sale!