Goodwill Hunting

In just a few weeks, the FSA’s confirmation of the application of customer agreed remuneration or CAR to existing contracts has fundamentally changed the way many IFA firms are valued and purchased. You so much as look in the direction of an existing contract, and its CAR time. Of the five acquisition deals I’m working on right now, all but the largest of them have been switched from a fixed to a variable consideration (ie pay on receipt), as the reality of RDR starts to dawn on everyone. If you were hoping to buy or sell this year, read on.

Buying IFA businesses used to be easy; identify and clarify the trail income and multiply by 3 to get your purchase price, pay some upfront and the balance over a few years and ‘Roberts your fathers brother’. Buying companies (ie shares so all assets and liabilities) was rare, as many firms were small, so the risks (and the cost of finding and assessing them) far outweighed the benefits. Unless the transaction value was north of £1m, you were probably buying a ‘business’ as a going concern.

A typical business purchase would include two primary assets; the tangible commission generating agencies (and the right to collect those commissions) and the goodwill of the clients. Given the tax treatment of these deals, the legal agreement would often suggest that the entire deal was ‘goodwill’ but the reality was somewhat different. The buyer would assume that the trail income would continue as it had for the vendor and this income stream would support the deal from a commercial standpoint.

So, what’s changed? Well, for one thing you can’t rely on the trail income anymore. You have to contact the clients when you acquire them (data protection) and when you do, it will stir up enquiries. The rules around legacy assets mean that in virtually all situations, this will mean CAR, so what?

Well, implementing CAR means coming up with a compelling proposition for one’s clients (of the 30 odd projects I’ve worked on, I don’t think I’ve ever created propositions just for prospects) and setting out the value you add as an adviser/planner/investment manager or whatever your particular brand of vodka is. This takes a bit of time and preferably some knowledge of New Product/Service Development. It doesn’t mean telling clients that nothing has changed (fee/commission offset) and sticking with 3% initial for product selection (how much value is left in product selection anyway?). Once you have compelling propositions, it kind of makes sense to arrange the firm’s people and processes around the delivery of them. This should give you (the owner), the best chance of pleasing/retaining clients, managing risk and generating profits.

So if you then fancy an acquisition (for whatever reason) you need to make sure the vendor’s clients are going to want what you have to offer. Otherwise you could buy a business, contact the clients and realise that they just aren’t interested in your proposition, which will mean the assets purchased are a ‘ball of chalk’ as they say in the trade – one puff and there’s nothing there!

The other issue is the concept of ‘direct competition’ something pretty alien to most IFAs.  Banks and other vertically integrated (grow it and sell it) organisations were thrown a rather large fish when the regulator decided to play around with the definition of ‘independent’. By making independence the ‘gold standard’ they have made it very hard for many IFAs to remain in that space. And what is the alternative, Restricted of course. And who will be there waiting for Restricted Advisers? The Banks, that’s who. Battered and bruised from the credit crunch, in need of both recapitalisation (revenue) and a change of image, they will be ready and waiting to advertise investments at nil initial charge vs the IFA who is charging 3% (they won’t mention the lack of advice in their proposition, but who cares, Joe Public doesn’t, they don’t understand the RDR, but they do understand the word FREE).

Moral of the story, be clear about your acquisition model (with flexibility comes hidden cost), save yourself time and money by asking the right questions upfront and look to avoid acquisitions with just a few choice clients (80/20 is often more like 95/5), unless you have a profitable proposition for the rest and a strategy to cope with the competition from the Banks.

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