(2 December, 2004) Doing the deal - getting a handshake, not a heartache

Alan Kenyon and Stephen Prendeville are happy to see advisers selling their practices and other advisers buying them, particularly when their business Kenyon Prendeville has been called in to get the deal across the line.

Less than five years ago there was little call for external consultants to help advisers buy and sell practices. That has changed as the industry matures from its small business roots into a profession, and as the first generation of planners looks towards retirement.

Planners can no longer count on finding someone with similar interests and a handshake to pass on what has been in some cases three decades of work, and the staff and clients that come with that.

As such, more deals are starting to come unstuck and groups like Kenyon Prendeville are being called on more often to ensure a sale goes through.

Kenyon says the most common reason for failure when selling a practice is a lack of cultural alignment.

This is a result of an unrealistic notion that the buyer has the leverage as they hold the chequebook. But Kenyon says the buyer does not hold the business and never will with an arrogant attitude.

“Purchasers are often good planners but not good business people and we regularly see some arrogance from buyers who expect vendors to be upfront and lay out their business on the table for inspection,” Kenyon says.

“These have been genuine sellers but the purchasers have ridden roughshod and this causes problems.”

He says both parties need to respect the work done by the other which is lacking in those who don’t have professional etiquette.

The other problem area is that buyers want to see meaningful business data which means solid client segmentation information. This means going beyond just funds under management figures which Kenyon Prendeville states is the most common set of data advisers have to hand.

“In fairness we can say each planning business usually has some sets of data, often gathered through their own or dealer’s technology or via an investment platform but in many cases it is not very deep or not up to date.”

Advisers are also being caught out by unrealistic expectations surrounding price, which have been distorted as they see buyer of last resort (BOLR) agreements as providing a floor to their business valuation.

Kenyon Prendeville maintains that in some cases this is now the ceiling and many dealers reserve the right to buy but are not compelled to do so.

According to Prendeville, the difference between advisers’ expectations for the sale of the their business — often inflated by unrealistic BOLR valuations — and what they are being offered is now deferring the exit of many advisers who are otherwise ready to sell their practice.

However, disappointment can be avoided if advisers prepare adequately and have a realistic view of their own business with any transition being well thought out and communicated. Getting professional advice is also important, although too much advice from the wrong people can turn out to be a stumbling block to a successful sale. Kenyon Prendeville cite a case they were involved with where an adviser sought advice from a wide range of professionals but failed to get the right information.

“The adviser was a first time buyer and he consulted with his accountant and lawyer who gave him some information but it lacked industry understanding and commercial insight about the financial planning market,” Prendeville says.

“In these cases other professionals can be consulted but it should be on a first principles basis unless they have that understanding.”

For those advisers who have reached the negotiating table and are set to make a deal there are some traps which may not break the deal but may lead to disappointment after the paperwork is signed.

Chief among these is a restraint of trade clause in a sale agreement which Kenyon says is an important issue for sellers if they want to continue to practice, as well as purchasers, whose aim should be to ensure there is no intent to re-enter the market on behalf of the vendor.

Kenyon Prendeville says there are few protections a purchaser has apart from the courts if a seller breaks a restraint of trade agreement, but purchasers can shore up the business by ensuring they service the clients after the transition of ownership.

Alternately, they advise that if the seller does plan to re-enter the market, that the purchaser should re-consider the deal and avoid buying that business.

The other major issue is deferred payments, which is a common form of paying for a planning business, but one Kenyon Prendeville generally advises against.

“A payment that is contingent upon an uncertain event, or that is deferred into the future — or both — is worth less than a fixed sum today. Despite the widespread convention for selling planning practices upon such terms… we strongly advise vendors against accepting such terms,” the consulting groups wrote in a recent article published by Credit Suisse Asset Management.

The group says the condition is generally a “manifestation of the uncertainty of the deal”, which vendors should attempt to alleviate by addressing a buyer’s concerns directly.

“Where, however, a potential buyer insists — as many do — upon some deferred and/or conditional component, this may be in the interests of the vendor if the terms are sufficiently favourable,” the group says in the article.

And lastly, the most important but overlooked issue is can the purchaser pay?

It may sound obvious but it has been a problem for many advisers and Kenyon recommends asking the question upfront.

“We have seen people go as far as taking out personal guarantees to ensure the sale goes through, so it is worth asking if the funds are available before entering protracted negotiations,” Kenyon says.