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.

Maybe it’s not a Twitter thing, maybe it’s a wider trend, perpetuated by the overwhelming focus on Entrepreneurship. Everywhere you turn, there’s some self-appointed guru telling everyone that they can achieve great things, that they will succeed, that they can save us all – hero’s, every last one of us! This of course is just a fashionable way of dressing up the fact that small business is being offered up as the answer to all our problems. In the UK at least, our government has ’taken one for the team’, bailing out those larger institutions who had got themselves into a spot of bother and landing the taxpayer with gargantuan structural debt problems for years to come. The bankers have got off with a slapped wrist and public sectors workers are shouldering significant burden as a consequence (note – for me, striking is wrong on so many levels, I feel your pain public sector worker, but bullying never solved anything).

What you need to know if you’re starting a business, is that you will fail. It’s not the sexiest of messages, granted, but its the truth. The chances of success depend not on your idea (the one you start with is highly unlikely to be the one that makes it big), they have little to do with the advice you picked up from successful entrepreneurs, self-help books or any other form of material designed to make rich people richer. No, you’re chances of success are largely down to whether or not you can keep going long enough to get it right. This is often explained away as a lack of resources, and running out of money (usually when you least expect it) is still the number one reason most start-ups fail.

I like to think it’s not a lack of resources, it’s a lack of resourcefulness. If you want to succeed in business, you need to accept failure and to use it to your advantage. Learn from it, grow as a person (not as an Entrepreneur), listen to what people tell you about your product or service, sweat the details to make to make it right, work all hours, find a way to make it work. It’s your determination that will make the difference in the long run and that’s not something you can read up on in a book. Take a long hard look in the mirror and be honest about the individual staring back at you. Do you have the drive, do you have what it takes?

I was lucky enough to attend a presentation by Sir Ranulph Fiennes recently. Explosions, frostbite and deep insights into the human condition were all on offer, but there were two things that really stood out for me. Firstly, he was very clear that the primary factor that determined selection for one of his expeditions was what motivates the individual, what drives them to action. This, he felt, was the sum of an individuals experiences in life and how that individual interpreted them. He made the excellent point that if you get it wrong, you can’t fire someone in the middle of the arctic circle! The second point that stuck with me (it wasn’t a takeaway…) was his answer to a question I got to ask him, nice and simple, ”what makes you happy?” His answer, “getting sponsorship, as that means I’m off on another trip”. Now that’s an authentic answer, from a man who has dedicated his working life to his cause. I say working life, as he’s been married for 30 odd years, so it just goes to show, you can have both! 

I’ve run my own business for almost 7 years now. I’ve had several attempts at expansion and not one of them has worked. Doubly difficult to take when the service you offer is management consulting. However, I know what went wrong and why. I’m honest enough to admit my mistakes and I look to the future with positivity, enthusiasm and determination. I know I will fail again, but I see it like a high jump competition; participants don’t jump 1.8m and then head off for a shower, they jump until they can’t get over the bar. Oh no, that reads a little like a motivational quote – I’m becoming one of them!  

With the changes brought about by Adviser Charging, many prospective purchasers of smaller IFA firms are suggesting that if 100% of the income created in an IFA firm is technically fee-based, then that firm should be valued in the same way as other professional fee-based firms (in other words accountants and lawyers). Those businesses are typically valued at 1 x annual turnover and while I suspect the FSA will leave legacy assets and trail alone, it’s not hard to imagine a situation where investor education,  competitive forces and annual reviews lead to a fairly rapid errosion of a firms legacy trail.

A firm that attracts a valuation north of say £2m would be valued in a different way. If you own one of these firms, you can expect to attract a purchaser who values your firm based on a wider range of metrics. You can usually narrow this down to a weighted average of profits, fund-based renewal and turnover. The deciding factor is often the profitability and generic multiples for privately owned firms are often between 6 and 8. If you are in the right place at the right time then you might get 10.

In this instance the shares are purchased and the due diligence process reflects that fact. And here’s the rub, in much the same way as investors avoid the equity gap (10 deals per annum, 1 or 2 will work and 8 will bomb, deal costs of X, so don’t do a deal below £2m and ruin the portfolio) purchasers will avoid the valuation gap if they possibly can. There’s significant risk, deal costs and so on, so buy as big as you can afford, provided you can manage the risks and integrate the assets you buy (that last one is by no means guranteed).

So, if you own a business and you’re thinking of getting out either just before or just after RDR, then get the calculator out and run some numbers. If you don’t like the look of 1 x turnover and 6 x profit doesn’t get you beyond £2m, then you might want to think about what 2 to 4 x fund-based renewal looks like right now – or get a plan in place to grow.