According to a recent report from NextWealth, acquisition activity in the advice firm sector nearly doubled from 2021 to 2022, with around £48bn assets under management purchased last year.
In 2023 so far, I believe volatile market conditions have caused a lot of players to draw back from or pause on merger and acquisition activity but as we move into the second half of the year, we’re likely to see a significant uptick.
While an acquisition can often offer an attractive option for advisers looking to grow their business, exit the market or retire, my experience is that many firms are often vastly under-prepared for a sale.
I’ve been asked countless times in the course of my career how quickly a deal can be done and the answer almost always hinges on the level of preparedness of the firm looking to be acquired.
So, how can business owners get off on the right foot and help make their firm a really attractive proposition?
1. Do your housekeeping
Being subject to a due diligence process is essentially a massive distraction from day-to-day business for any advice firm and its impact is typically underestimated. Therefore, it pays to do as much work in advance as possible and good housekeeping always oils the wheels.
Reviewing your legal, operational, HR and financial documentation and ensuring everything is in place and up-to-date should be any selling firm’s first step. Speak to a friendly M&A adviser or lawyer who has some experience of the sector and ask them for a copy of a typical information request list, as this will give any firm a good a starter for 10 in terms of the types of documentation a prospective purchaser may require.
The depth and breadth of information will vary slightly but management accounts, operational MI, a description of accounting methods and treatments, employment agreements, procedures in relation to data protection legislation and a summary of insurance claims experience are examples of just some of the things likely to be required.
2. Audit your compliance processes
Compliance is always a key area of focus and I would recommend bringing in an external specialist compliance consultant to effectively undertake a pre-sale audit. Being able to remedy any deficiencies in advance of a buyer discovering them in due diligence will not only ensure the process is a lot more efficient, but it could also prevent the commercial terms of any deal being amended. It’s also likely to favourably impact the level of protections required in the sale and purchase agreement.
If a firm chooses not to bring in an external expert, being able to demonstrate that their compliance risk management process is both well documented and fit for purpose in relation to the latest regulatory updates is imperative.
3. Beware of key person dependency
For smaller businesses, key person dependency can often be a tricky one. Acquisitions can be made with contractual obligations for leaders to stay in place for a certain timeframe but, in general, key person dependency equals risk in the eyes of any buyer.
Effective succession planning, outsourcing and knowledge sharing initiatives can all form part of a suitable mitigation strategy.
4. Review your client book
Having a clear understanding of your client book is key and will only become more important in light of Consumer Duty. The total number of clients is less important to a prospective buyer who will want to dig below this and understand how many of these are active clients and, equally, how many of them should actually be clients or require ongoing advice. Effective client segmentation and having a proposition that delivers the most effective products and services for client needs is vital and a large percentage of inactive clients, or a high client-to-adviser ratio, will raise questions.
It may sound counter-intuitive to potentially disengage certain clients as part of preparing a company for sale but buyers would rather see a smaller number of active, quality clients than a larger client bank that contains a volume of inactive ones.
5. Cleanse your data
The quality of a firm’s data is becoming ever more important and along with interrogating their client book, it’s advisable for firms to undertake a data-cleansing exercise.
This is essentially a spring clean in terms of updating or removing data that’s inaccurate, incomplete, duplicated, incorrectly formatted or corrupted.
Good data underpins accurate MI, business efficiency and good client outcomes and no buyer is going to want to import poor quality data into their own systems.
Preparation not only makes the due diligence process smoother and less painful but it also puts the advice firm owner in a much stronger position for negotiation, in terms of having a holistic view of their own business and its indicative value.
It’s work that will have to be done at some point, if a business is serious about looking for a buyer, so my advice to any business owners is to do it in your own timeframe, on your own terms and come to the negotiation table with your strongest hand.
Stewart Cape is head of corporate development at Progeny
