Our four panellists in the succession planning debate at the NMA Brighton Retreat – Julie Lord of Thinc Wealth Management, Nick Bamford of Informed Choice and adviser consultants Rob Stevenson of Kingmakers and Ivor Kellock of Kellock Wealth Management – hit the nail on the head with their questions to the audience.
There were, not surprisingly, no ‘don’t knows’ to Nick Bamford’s question, ‘Who has got family in their business?’, although only 28% put themselves in the family firm category.
The other panellists generated more surprising but equally telling responses to their questions. The answers underlined why this was such a key part of the two-day conference earlier this month.
For example, only 30% of delegates professed to a clear exit strategy – a question posed by Lord, who clearly has always had a good idea of where her business, Cavendish Financial Management, was going prior to its sale to Thinc last year. And 67% admitted they had yet to develop a strategy.
Building on the theme that advisers often do not have personal financial plans to match those they give to their clients, Kellock enquired: ‘How much is enough? Do you know?’ Less than half (47%) knew the answer.
Stevenson cut right to the chase with his question: ‘Is your business in shape to sell now?’ Nearly two thirds (65%) admitted they were not ready to sell, indicating they needed more time for business development.
The polls served as an excellent prelude to a series of short presentations by the panellists (see The panellists speak on page 41), which in turn provoked a lively question and answer session.
Valuations and metrics – a case study
One highlight of the session occurred when Jason McGuigan of Critchleys Financial Planning asked Stevenson what the current multiple was being applied to funds under advice.
This prompted a useful explanation from Stevenson, who has advised 30 advisers in recent years, about the way acquirers view metrics.
Stevenson, who is based in Tunbridge Wells, said in his experience purchasers would take a weighted average of the three main valuation methods: recurring income, multiple of profits and a percentage of funds under advice. Therefore it made no sense to focus on just one of these. ‘That is not how a purchaser will be looking at it,’ he said.
Stevenson took the notional example of a firm turning over £1 million with recurring income of £750,000. He criticised advisers who included income streams such as regular premium renewal commission in their recurring income. ‘That is a depreciating asset,’ he said, adding: ‘The income must be fund based. That’s where the value is. We strip out all the other rubbish.’
Assuming that recurring income was pure Stevenson said he would generally apply a multiple of four, producing a valuation of £3 million.
However, on the basis that the firm charged 0.5% a year, it would have funds under management of £150 million. Using a funds valuation and applying a multiple of three to that
£150 million, which was reasonable in current conditions, would produce a price tag of £4.5 million, he said.
Lastly, Stevenson turned to profits. To keep the figures simple, he said a well run firm could conceivably generate £200,000 in profits before interest and tax (PBIT) on £1 million turnover. Using a multiple of six would generate a valuation of £1.2 million.
Obviously, the funds valuation produced the best result for the seller. ‘This is why asset managers prefer that model – but they have control over their assets,’ he cautioned.
Stevenson predicted that ‘advisers would be hard pressed to get that. My feel for the situation is that such a firm would get £2 million,’ much closer to the level calculated using PBIT.
Turn processes into assets
Kellock, who has many years’ experience advising owners of small and medium-sized enterprises (SMEs), added to the debate on valuation measures. ‘The general misconception is that assets under management are key – they are attractive but they are not the be all and end all.’
Kellock, who operates from Sevenoaks in Kent, emphasised that advisers needed to focus on other aspects of the business to build up additional value in their firms.
Elaborating on a point on which there was a consensus among the panellists, Kellock explained how the foundation of succession and exit planning was running a good business. Business and marketing plans were essential, he said.
Assuming these vital documents were in place, Kellock said an adviser who was looking ahead for an exit three years hence needed to start with an analysis of their business.
Obvious areas to work on included:
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development of the brand;
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looking at internal processes and streamlining them;
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development of the people around you;
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managing all your assets – funds and intangibles such as intellectual property.
Kellock said advisers often missed bits of their business that acquirers would find attractive. For example, proven strength in marketing and client acquisition could enhance a company valuation. ‘Do you have a marketing machine with tried and tested methods that generate new enquiries for you?’ If not, with a bit of focus and determination, you might be able to build one, he said.
Other processes that could become assets were a compliance team or a training regime. ‘A good training programme that can take people from next to nothing to senior level is valuable,’ said Kellock.
Indeed any practice, area of skill or specialism that an acquirer could regard as something they could take, scale up and export to their existing businesses would be extremely attractive, he added.
And he said the back office should not be forgotten. ‘Most IFA practices are not as efficient as they could be. They’re focused on advice when a lot of attention needs to be on the back office.’
Lastly, he recommended some further reading for advisers looking for other ideas and inspiration. Earlier this year Royal Bank of Scotland and Ipsos published Beyond tomorrow, a survey of 270 SME owners.
Contact: Ivor Kellock at ivor@kwm.cc and Rob Stevenson on rob@kingmakersgroup.co.uk.
The panellists speak
Nick Bamford, Informed Choice
For family-owned businesses like Informed Choice there is a clear imperative for succession planning and developing an exit strategy.
As Nick Bamford, joint managing director, explained: ‘Only a third of family firms move from the generator, or ‘parent’, and leave the business to the second generation, and less than 10% of that third move on to the third generation.
‘In other words, my grandchildren are highly unlikely to be in the business.’
Add in the different dynamics of a family firm and Bamford said it was essential that both generations of a family firm sat down to decide the future.
Nick, 53, and his son, Martin, did this a few years ago and decided to get Informed Choice in shape to be acquired. Brand, assets, people and processes were all areas they targeted for development.
Bamford said he understood why the pressures of everyday business life mean many advisers do not time to plan their own futures.
Informed Choice’s solution to this problem four years ago was to separate the roles of the senior management team, with Nick focusing on clients, Martin on technology and marketing and Andrew Neligan on administration and finance.
Nick is a strong believer in the need for advisers to build value in their businesses by moving assets on to a single platform and putting in place client agreements that spell out service levels and price.
The combination of consolidated assets and clear terms is very attractive to potential acquirers,
he said.
Informed Choice has just begun the process of switching its £25 million of assets from FundsNetwork and Cofunds to Standard Life. It aims to complete this by the end of next year and to increase funds under advice to £100 million by the end of 2010. Nick estimates this will require the firm to find 117 new clients.
Julie Lord, Cavendish Financial Management
Get yourself ready is Julie Lord’s advice to her peers.
Lord has been there and done it already, having hit the headlines last year with the sale of her business, Cavendish Financial Management, to AXA-owned Thinc.
Lord always had her eye on the end game, although when her and husband Andy established the business as pure fee financial planner in 1991 with the aim of having high recurring income, they did not realise how astute they
were being.
‘I didn’t realise how good a business we had until we had the consultants in! They said they had seen a lot of firms in a terrible state. I don’t mean it to sound big headed, we didn’t do it deliberately; it just seemed common sense at the time to set it up that way,’ she said.
Having bagged a lucrative bid from Thinc, Lord was shocked that, in a response to a question from Ivor Kellock, just over half of the Brighton Retreat audience (53%) did not know how much they needed to achieve from the sale of their businesses to fulfil their goals and dreams.
Apart from the desirability of advisers practising what they preached and establishing their own financial plans, Lord said planners with good businesses needed to be prepared for an approach from a potential acquirer and have an answer to the question: ‘How much is enough?’
‘If someone comes in tomorrow with an offer, you need to know if that’s enough or if you need to negotiate,’ she said.
Do not rush into a deal. It is as important for the acquiree to do due diligence on the acquirer, as well as vice versa, said Lord.
If business owners were being asked to stay on after the takeover they needed to ensure they shared the same ethos and approach to clients and business as their new partner.
Equally important, if things go well, advisers must steel themselves for early retirement. Not all bidders want the principal to remain in place and are mainly interested in the client bank. ‘Be ready in your own head that you are ready to stop work.’
But most importantly, she told advisers to be realistic. ‘It’s always struck me, whenever I talk to IFAs about the valuations of their businesses and then talk to potential acquirers about how they see things, there is an enormous gulf of expectations.
‘IFAs must be realistic. Talk of a valuation of eight times earnings before interest and tax – they are not going to get it.’
Ivor Kellock: Top 10 things to consider
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There are three stages to business sale/succession: before/during/after
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Be aware of the emotional issues surrounding the exit and key drivers and potential barriers – what is the future of the business, what do employees want from the deal?
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How do you value the business? Are multiples the only way forward? Is there hidden or undervalued intellectual property or intangible assets?
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Where is your added value beyond recurring income?
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What value do you want to achieve? Is this possible?
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How is the business structured? Consider shareholder/director/employee: what roles do you hold and fulfill?
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Can the business run without you?
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Do you have business and marketing plans?
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Set a date to exit?
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Are you tired of the business?
Rob Stevenson: Potential pitfalls and problem areas
Marketing
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Websites are pot luck and buyers are often inexperienced
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Contacts and networking is best
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If you have three years to go – start now
Valuation
Reaching heads of terms
Legal documentation
Completion
Post-completion
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Expectations
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Earn out
- Risks