How to be a ‘sale-ready’ financial advice practice

Financial advice businesses are being urged to be “sale-ready” at all times amid the current M&A climate, and repair their roof while the sun is still shining.

As large wealth management players take an increasingly opportunistic approach to M&A deals and smaller players experience a sense of fear of missing out, industry professionals have said it is critical that business owners are sufficiently prepared when a buyer comes knocking.

Terry Bell, principal at Business Health, told Money Management that all financial advice firms must be ready to enter a sale negotiation regardless of the maturity of their business.

“A lot of businesses today, at the smaller end, are mostly unprepared to enter into a sale negotiation. A lot will say, ‘I don’t need to because I don’t intend to exit today’, or ‘I’ll get around to it at some time’,” Bell explained.

“Every business – whether you are selling today, think you’re selling the next three to five years, or not at all – needs to be prepared just in case something happens.”

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Echoing the principal’s thoughts, Mark Calvetti, head of corporate finance at William Buck, said advice firms never know when they may receive an offer they can’t refuse.

“That’s one thing, but you also don’t know when something could take a different turn. It could be a health issue, it could be loss of key staff. My view is that every business needs to be sale-ready at any point in time,” Calvetti said.

To prevent advice leaders from being underprepared in the event of sudden trigger events, such as illness or resignation, Bell encouraged businesses to construct an information memorandum document.

“You need a very comprehensive selling document – we call it an information memorandum (IM) – that describes exactly what your business is, how it’s performing, client satisfaction levels and key indicators, at all times,” he said.

This document acts as a clear snapshot of the practice for potential buyers to assess prior to entering into a deal. While it can vary from business to business, Bell said an IM typically includes:

1. Service offering – range of services, fee structure, qualifications, and average revenue per client.
2. Client analysis – a deep dive into the makeup of the client base, including total number, age, occupation, location, fee levels, duration, and satisfaction ratings.
3. Revenue – level, type (risk or investment-related, new or ongoing), recent history (say last three years), and reasons for any fluctuation.
4. Main sources of revenue – noting regular referral centres.
5. Supporting product and platform providers.
6. Financial planning software and CRM system.
7. Compliance – results of last round of audits, complaints, and breaches (if any).
8. Staff – qualifications, specialist expertise, development pathways and expectations.
9. Key metrics – benchmarked to the marketplace.
10. Business valuation – preferably by an independent source.

Even if a business owner isn’t planning to sell for several decades, Bell urged all advice leaders to prepare such a document as it will help them to identify any weaknesses and areas of improvement.

“If you don’t even intend to sell today, in preparing that document, you’ll come across things that maybe you need to look at now. It could be a staffing issue, or a fee issue, or a tech issue.

“Create a document that portrays your business, keep it up-to-date, and by the very exercise of constructing that document, you identify areas you want to work on. It will help you to strengthen your business even more today.”

Echoing this, Radar Results founder, John Birt, said documents typically required from a seller at an initial stage can include information about client ages and locations, account balances, platforms used, and recurring revenue from each client. As a sale progresses, information is expanded to names and addresses, policy numbers, commission statements, revenue statements from licensees, and product providers used.

Calvetti emphasised the importance of seeking out external input that can provide an independent assessment of the firm and benchmark it against direct competitors.

He unpacked: “Ensure that you are sale-ready at any one time. That means ensuring that you have someone looking at your business independently from the outside to give you a warts-and-all look at the business, because there are areas that need improvement in any business.

“The way to do it is to actually bring external people in and talk to their advisers, so they can actually independently benchmark their business against their competitors. Ensure that you know your business is operating within industry benchmarks.”

Ultimately, business owners should look to work on their practice before issues arise, the Business Health principal continued, quoting former US president John F. Kennedy.

“When the sun’s shining, your roof isn’t leaking, but it could have a hole in it when the rain comes. As the quote goes by JFK: ‘Repair your roof when the sun is out’ – when you don’t have to do it, but you’re preparing for the future,” Bell concluded.