As first published in Citywire
Consolidation in the financial advice profession has been a hot topic since the retail distribution review in 2012. Consolidators have been acquiring IFA practices over the years. With the regulatory burden becoming a larger issue for those who run their own firms, the rate of acquisitions is showing little sign of slowing down. Funding seems readily available for consolidators, so it is no wonder this is the case.
I have acted for over 20 vendors who have sold their IFA practices to consolidators since 2014, and during this time I have gained valuable insight into the acquisition process from the vendor’s point of view.
The acquisition process is grueling for vendors who, for the most part, do not have previous experiences selling a business. Most clients in this position tell me this is the first – and almost certainly the last – time they will sell a business. Only those who have sold a business and experienced the process first-hand can appreciate how time-consuming and stressful it can be.
Integration frustration
While the impact of selling a business cannot be underestimated, one aspect that is often overlooked is the post-completion integration process. Vendors (and their lawyers) often breathe a sigh of relief when the deal completes and the seemingly endless rounds of negotiation and due-diligence requests finally come to an end. It is at this point, however, that the hard work really begins.
Vendors invariably have two concerns for the post-completion period: what will happen to their clients, and what will happen to their staff? But from that point onwards, they must come to terms with the fact that the buyer owns the business and , ultimately, decision-making now rests with the new owner.
For some vendors, the sale will be a prelude to their own retirement, which may take place within a year or two of completion. While stepping away from the pressures of the profession is tantalisingly in sight following a sale, a retiring vendor may find themselves working hard in the final years of their career. The onus will be on them to successfully had over client relationships that have been many years in the making.
Smooth handovers
Sellers who have planned for their retirement may already have started this process prior to the sale by employing or engaging an adviser to take on their clients. This can work well but, invariably, the adviser will need to be incentivised as part of the deal to feel they are rewarded as well; it is often not enough for a retiring adviser to hand over his or her clients.
For this reason, I have often seen deals where successor advisers are brought into the deal to ensure they are suitably incentivised to facilitate a smooth handover of clients following retirement.
For vendors who wish to continue with a client-facing role and even expand their client base beyond a sale, their priorities will be different. Often, this category of vendor relishes the chance to get back to what they do best – advising clients and building relationships without the constraints of also having to run the business. They will also want to know the future prospects of the acquirer, particularly if they are receiving equity from the deal.
It is important for vendors to understand the framework they will be advising within post-completion. Does the buyer’s client proposition fit with the adviser’s approach to client service? Regular areas of concern include charging structures and approach to risk. While an experienced adviser may be equipped to deliver the best and most innovative solutions for their clients, will that fit with the buyer’s compliance policies and procedures? If not, will they be able to provide the service their clients expect?
Charging change
Vendors are used to setting their own charging structures – particularly for high-value clients. An acquirer will often want the acquired practice to adopt its charging structures, which can cause concerns about the impact on existing clients, who have been accustomed – sometimes for many years – to a certain way of doing things.
Acquirers have their own processes that allow for individual discretion, but those processes still often require the buyer’s sign off to preserve the continuity of a fee structure. The point is that post-completion vendors no longer have complete discretion to do things their way, and this should be considered before the decision to sell.
Larger firms also have employed advisers who need to be factored into the post-completion process. Wile client relationships might ‘belong’ to the firm, principals are often aware that employed advisers are client-facing and a key part of delivering the full value of the business to an acquirer. It is therefore important that employed advisers feel they can progress within the acquirer’s wider business to ensure they are fully motivated during the post-acquisition period.
For the advisers themselves, the post-acquisition period is obviously an anxious time when they are getting used to new processes, procedures and colleagues. It is easy to overlook this when vendors may (understandably) be preoccupied with meeting ear-out targets and integration requirements and the buyer moving its attention to is next acquisition. Taking to steps to make sure advisers feel valued is an essential part of the integration process.
Putting the time in
Turning to more practical matters, vendors often have to spend significant amounts of time ensuring clients are engaged either with the target company (in the case of a share sale) or with the buyer directly (in the case of an asset sale). The time needed to do this should not be underestimated. We have heard first-hand from clients how time-consuming this can be.
In practice, advisers must meet with and re-engage each of their recurring-revenue clients. Not only does this take up a significant amount of advisers’ time (which they may prefer to spend on new business development), it also creates significant demand on support staff.
Prior to the slaw, the vendor will be able to bring in appropriate support, but following completion this likely to be less straightforward. A buyer may wish to redeploy support staff to other parts of their own organisation, and the seller may find resources are more thinly stretched.
This is likely to have an impact on support staff themselves, who may be asked to work hard during the integration process. If the seller needs to hit earn-out targets (as they almost invariably are required to do), this will place an additional burden on staff. For this reason, support staff should feel like a part of the integration process and be adequately incentivised. More often than not, transactions involve some form of bonus incentive to support staff for this very reason.
The post-completion period may also involve a relocation of the business, which impacts both staff and clients. Staff will need to be consulted on any proposed changes, and clients may need to adjust to visiting a different office in a different location. All these changes could be disruptive and add to the general upheaval of the post-completion process. For the children of staff, this disruption can be a real issue as well.
Is there a bright side?
Wile post-completion integration is undoubtedly a challenging period for all stakeholders in the business, things do eventually settle down. Vendors always sell for a reason, and while they sometimes express second thoughts about whether they should have gone ahead at all – particularly in those months or weeks after the deal where things are at their hardest – they should not lose sight of their original reasons for selling.
This brings things full circle to why an adviser would decide to sell in the first place. For those who are thinking of selling , consider some of the issues raised here for their potential effect on your own business, should you decide to sell. If advisers can look ahead and visualise how things may look in the post-completion period and beyond, they will be in a much better position to decide whether the time is right to sell.
If advisers simply focus on the short term and the financial aspects of the deal, that can affect how things paly out post-completion, especially if the relevant issues cited above are not properly acknowledged. The right balance of determination and cautious preparation will stand you in good stead.