In my article of last week I wrote about getting your business metrics right and how to shape your business for sale.
In this second article, I’d like to focus on the actual mechanics (method) of payment / in completing the deal? This is a very common issue.
It is all about the negotiation. Although often, if a vendor seeks a large (or even entire) payment of the deal being ‘upfront’ or immediate, then all the risk sits with the acquirer and the acquirer will discount their offer, based on this risk.
Fast Versus Slow
In other words, a vendor might find it achieves a lower lump sum price if its wish is to walk off to their early exit (from the business) in a matter of days or weeks.
The other, more gradual route moves through a spectrum of ‘remaining on board’ – through a form of ‘earn out’ period. And whilst an upfront % (of some 10 – 50%) is possible, the balance would then be earned over a 1-5 year period, post deal. This moves the risk further toward the vendor, who would essentially have ‘targets’ to meet, in order to achieve the fullest valuation pot figure.
The way the deals here are normally done is that a “business plan” is completed through the dialogue between the vendor and the purchaser – and the business plan will show a certain predicted ‘performance’ over the earn-out period. If the business plan is ‘met’ – this would (for example) bring in “£X” amount of profit over the journey. If this is then divided by the (say) 3 year journey, we get the annual profit figure – and this can be given the “X times EBITDA” treatment.
This comes up with a ‘pot’ of deal money which is planned/anticipated. If this pot was, say, £1 million, then the parties might agree a 20% initial up-front payment (£200,000) with the balance of £800,000 only being earned if the business plan comes to fruition.
The above is unlikely to be an ‘all or nothing’ balancing payment – but there would be a proportionate lessening of the balancing payment where the business plan was proportionately unfulfilled.
HOW CAN I GET MY BUSINESS SHIP SHAPE?
Firstly, we need to recognise the need for change. This is actually harder than people think.
Change in our Industry, is about our heart and our head.
When change happens, be it moving house or the retail purchase of a shiny iPod, M.R.I. scanning of our brain shows that it is emotion that drives our inclination to accept (or reject) the change presented before us. Not logic – but emotion. We are all humans, after all.
An important lesson is to ensure inclusion and engagement (early on) from staff with allocated responsibilities for their own aspects of the ‘ship-shape’ change. People naturally prefer their own change contributions, over those directed to them, from on high.
So, to the Practicalities
What is going to help a business enhance its readiness?
We begin with a list of the proven “Value Enhancers” we saw in my previous article – the factors that due-diligence professionals use whenever they value the monetary worth of IFA Firms in our RDR context. And which will in turn define what they are willing to pay for this IFA – based also, of course, on industry comparables
A due-diligence professional will apply a collective of these criteria and will use a set of spreadsheets to apply scorings and “Monetary equivalence” calculations based on them.
They will further discount the valuation figures where they perceive uncertainty and risk (sitting either within the client bank or across the wider Firm’s governance). A due-diligence professional will not be swayed by emotional persuasions or standalone statements of belief – but will ask for evidence! and data that supports the case.
How can I address these points, then?
“By making a start” would be a common reply – and by receiving help and expertise.
By applying the FCA’s strong Risk Profiling guidance to demonstrate a clear coverage of “Tolerance, Capacity and Goals” in client risk profiling.
By using the IFA’s own data and testing the “flexing” of customer propositions in order to show how loyal the IFA business is to the different segments declared. Is there discrete daylight between propositions, or do they morph into one another?
By testing the different remuneration models against a mapping of client case sizes and client need scenarios – to examine the satisfaction of TCF as well as expected profit margins for the IFA business.
ADKAR is a helpful anagram used with Financial Advisory businesses:
A D K A R
Awareness of need for change
Desire to participate and support change
Knowledge of how to change
Ability to implement required skills and behaviours
Reinforcement to sustain the change
Elements of regulatory uncertainty remain; and whilst changes to the urgency and nature of any change is supremely relevant, a business implementing consistent, clean and de-risked processes (even outside of RDR) is a savvy one, for succession and competitive advantage.
Richard Komarniski (“The Human Factors”) comments on distraction and a lack of focus being the most common blockages to change – and whilst consultants will provide different quantities and qualities of guidance, the honest truth is that IFAs have much of the required ability and some (carefully apportioned) capacity to implement RDR change.
Mapping Advisory Time and Profitability
The chart below represents an IFA’s test of the average time spend (in hours) for different client case sizes. On simple mathematics, different remuneration charging leads to different profit margins (or losses). The empowerment this exercise offers the financial adviser is to add their own “hourly rate worth” and unique hourly spend data into their own calculations, to work out profit and loss.
The next step is to map a full spectrum of “Fit for purpose” Investment Solutions (from Full DFM, through Model Portfolios, OEICs, Index/Passive Funds/using an online Web/Portal) to ensure the IFA can offer robust advice, within a profitable framework.
According to David A. Ricks “Blunders in International Business” – by far the most common reason for business goals failing is a lack of change – not too much change! Don’t be afraid to challenge yourself, and your assumptions.
Aim high – a changing business should result with empowered, able staff who have the skills to leave but the desire to stay.
An ideal purchase target is a company that has processes that are robust & scalable – but hard for other businesses to copy from the outside.