More than 50% of financial advisers expect to retire in the next 10 years. What exit strategy options do they have?

Rear view of man standing in front of many different doors trying to choose one.

By AdviceBridge

It’s expected that more than half of UK financial advisers will want to retire in the next 10 years. This will mean up to £500 billion of funds under management will transition to a new adviser or financial advice firm.

For many advisers, figuring out how to retire from their business while continuing to support staff and clients can cause a real conundrum. Different options will tick different boxes from moral to financial.

So, what exit strategy options exist for IFAs ready to retire? And how do you make sure everything is in order and being left in safe hands?

Choices and options

There are only two choices to be made when going to sell a business, either:

  • Choice #1 – Take the DIY route and sell the business yourself, or 
  • Choice #2 – Sell via a broker.

However, within each of these choices there are a number of options available, focused around who the acquirer is:

  • Option A – Sell to your team through an internal management buyout
  • Option B – Sell to a similar or slightly larger firm – a trade sale
  • Option C – Sell to a larger consolidator.

There are pros and cons to each one of these so it is worth considering what you really want to achieve and how, so you can focus your efforts in the right area and not waste time and effort pursuing the wrong path.

Weighing up the choices – DIY route or selling via a broker

Selling the business yourself may sound like the ideal option. 

Problem is, it may not be as easy as it sounds and can prove difficult, disruptive, and time-consuming. This is especially true if you’ve never done it before and don’t fully understand what needs to be done, as it can mean you get caught up employing solicitors and consultants who can overcomplicate the whole process.

Obviously, it saves on paying brokerage fees, however a broker should have a database of firms it can market to. 

This then raises the question as to whether you are happy that a wider range of people start to know you are looking to sell or would prefer it to be done discreetly with a few target prospects.

At what point do you inform your team? If you don’t inform them and they get suspicious or find out another way they could lose heart, their work suffers, or they could even leave the company. All at the point you are trying to show a prospect a robust business.

If you know a likely acquirer then all well and good but if not how and where would you go? Is the timing right for them? These things may take years for some firms to build up to even though they have the right intentions.

Even selecting a broker is problematic. 

Most will advise that they can achieve a higher value than is possible to get you to sign up with them over a competitor. Once you have signed the contract and are “locked in” they will set up a couple of prospective meetings with interested parties where offers will fall somewhat short of your expectations. 

If you don’t accept one of these offers, they will often just leave you to stew knowing you can’t get out of the contract. Months down the line, once you are having concerns and “re-engage”, they will set up more meetings and you will receive similarly lower offers, but this time resign yourself to accepting one.

It is very unlikely you will achieve the valuation you were originally offered (especially from larger firms) who often adopt the “fish & chip” technique. This is when they go fishing and offer decent valuations (again you are more likely to go with the higher offer) before then knocking you down – chipping the price as they go through due diligence, siting various business performance metrics back to you as justification. 

Done incrementally over time to wear you down, towards the end you will just want to get the deal done. This means that most firms don’t go at the rates some would have you believe.

Option A – Selling to your team through an internal management buyout

There are several key benefits to selling through a management buyout, including:  

  • It eliminates the time-consuming task of finding a trade buyer
  • There’s no need to approach competitors and disclose sensitive or proprietary information
  • You can be confident that you’re leaving the company in “safe hands” (This can be particularly important if you have a strong emotional attachment to the business).

On the other side of the deal, the managers wishing to buy already know and understand the business, which helpfully reduces uncertainty and, to a large extent, can also eliminate the risks of buying. 

An internal buyout has advantages for both buyer and seller, the most obvious being the smooth transition from one owner to the next. Since the buyers are already closely associated with the business, their continued presence can be comforting for clients, partners, and employees. 

This route can also be done with minimal disruption and the business can continue to operate as usual.

However, if the process is unknown to both sides and there is no guidance the whole process can be overcomplicated and protracted.

The success of a buyout relies on the expertise of the current management. If a company is being sold from distress or administration, the finance organisation may investigate the role of the management team in the company’s performance. 

Where financing firms determine that the buyout team were in part responsible for the decline in business success, funding may be pulled, causing a significant roadblock to the sale.

Even where the company is healthy and profitable, financers will closely examine the skills and experience of the buyout team. If they believe you have an outsized influence on the success of the business, there’s a chance that the financial backers may decide that the strengths of the remaining management team are insufficient to drive the company forwards.

Option B – Selling to a similar or slightly larger firm, such as a trade sale

As with funding a management buyout, financing may be the biggest obstacle to successfully selling your business through a trade sale.

High street lenders have limited or no financing options available for supporting IFA transactions. Plus, the terms and structure of any finance can be prohibitive. Financing often requires a personal guarantee, equity injection, and other debt-servicing challenges. 

It is important to check straight off with any potential purchaser that they have the funds available and where they are coming from as it can be very disheartening to get a considerable way down the line before finding out that they don’t have the funds to acquire you.

However, you are much more likely to find a better fit partner. A firm with a similar view, approach or values where it will cause the minimum of impact to your clients or your staff.  

Option C – Selling to a larger consolidator

There is also a moral dilemma when considering selling, especially to a consolidator. You are more likely to receive a higher value from a consolidator than through a trade sale. However, the higher value may come at a price for your staff and your customers.

Consolidators seek to find appropriate advice businesses where they can consolidate revenue, clients, and FUM. 

Typically, they will be seeking to form a single entity that operates in-house portfolios and platforms that increase margins overall and seeks to capture more value.  

Because the business model is predicated on making a significant number of acquisitions each year and creating incremental value from increased earnings multiples and recurring revenue, this could be a simple option for many IFAs seeking to retire.

Be warned, though: not all consolidators are equal.

Some consolidator firms are building large businesses. While these could prove to be a good home for some firms seeking an exit, the model tends not to be ‘client-centric’ and can be seen in a dim light by IFAs for various reasons. 

The two most notable drawbacks are:

Consolidators generally seek to migrate FUM to their restricted portfolios and platforms. Obviously, this won’t necessarily put the needs of customers first or optimise for ‘treating customers fairly’ – which could either become a bigger problem or be solved by the new Consumer Duty rules.

Selling to a consolidator can be highly disruptive. A transaction of this nature could harm the business philosophy and operations of the advice firm. It may also require staff to be subject to contractual restrictions that limit their ability to create value for themselves.

Perhaps unsurprisingly, this route is seen by many IFAs as the least favourable option for clients and staff because it goes against their business philosophy, yet there can sometimes be little option.

Other considerations 

The traditional valuation metric applied to advice firms is around 2% to 3% of assets under management. In recent years, where consolidators have been able to access capital at very low rates, valuations have crept higher, with some as high as 8%. 

Higher valuations and higher multiples are only paid where the advice business has a very similar model to the acquirer with many elements aligned (usually medium-sized advice firms) or where the acquirer can see that it would be easy to transfer clients to their own central model with minimal effort (small advice firms).

Also, acquisitions very rarely result in you being paid upfront. Most involve an earn out structure where a percent of payment – typically around 50% – is deferred for 24 to 36 months. This means the buyer expects to pay out the other half of the deal cost through future cash flows, based on retention of clients and other targets.

If you are looking to sell your business, whatever choice or options you decide to pursue, it is always better to plan in advance ensuring information is easily accessible and clear to understand for any prospective acquirer. This can significantly increase the value that you will receive. 

Good luck. 

Next month, read about how to prepare your business for sale and the important role technology plays in securing a successful outcome.