Why working with a trusted adviser really matters-Part 2

Why working with a trusted adviser really matters-Part 2

In this second article in a two-part Q&A series with IFA Magazine’s Brandon Russell, Keith Brown, Chief Executive of Wealth Holdings, discusses what good outcomes look like for both buyers and sellers of advice firms. They look under the bonnet to discover the key considerations to take into account to achieve successful outcomes and focus on why people really do matter in the process. Part one of this conversation was published in the May edition of IFA Magazine.

In this, the second and final part of their conversation, Brandon and Keith discuss what good outcomes look like for both buyers and sellers of advice firms. They also take a look under the bonnet to discover the key considerations to take into account to achieve those successful outcomes and focus on why people really do matter in the process.

Brandon: What does a good outcome in terms of exit or succession planning actually look like to you at Wealth Holdings?

Keith: A good outcome is satisfaction all round. We’ve all heard of buyer’s regret, I moved house a couple of years ago, and it’s natural to think could I have got it cheaper if i’d negotiated harder? The minute an offer is made, buyers might think they could have offered less, and sellers might think the opposite. At the end of it, as long as what each party gets is fair and promises and expectations are met and kept, that is what a good outcome is. Also, it matters a lot that the clients of the business have been retained too of course. If you’ve got 120 clients and then two years down the line, there are still 120 clients then that is a good outcome. The clients are being looked after and there’s good service because all deals are conditional.

The payments involved are generally made over a two or three-year period. That’s done to make sure that the buyer gets what they thought they were buying all along. Two years down the line, there will usually be some natural loss of clients along the way, but as long as it’s within normal boundaries that’s ok. Most of the clients will have been retained, the advisers, the staff have stayed, the ones who wanted to stay at least. Those who wanted to retire have retired and got their money and they’re happy with that. Of course, as happy as a seller may be, they might always think they can get a little bit more, but satisfaction comes from getting what was agreed, promised and expected. That’s where we come in – to ensure that there are no nasty surprises.

Some acquires are very proud of the fact that they always pay more based on the original figures. There are a couple out there that can demonstrate it, and that’s great because actually the firms have flourished and been successful, and have grown over the two or three year earn out period and during that time. The end payment is actually slightly larger and that’s a fantastic outcome, because everyone’s a winner then. In that scenario, clearly the clients are happy and the service has been provided and as long as all the other success factors such as staff etc have been met, now that’s a really good outcome for us

All our work is focussed on achieving whatever the goals happens to be, whatever the numbers happen to be, for each individual situation which we’re working on.

It can certainly get quite complex along the way! Yes, it is a negotiation, it is a challenge but there’s a real emotional element to this, which can sometimes be overlooked.

The owners of IFA firms may have built and run a business for 20 years. It’s their ‘baby’, and they’ve worked hard, done their best, built a business in a way because they think it’s the best way. Then someone else comes along and says we don’t do it that way, so they’ve got to change and that’s difficult Of course, it might be that the buyer has greater capacity to invest in technology, they may well have got something different. No one is saying it’s better, it’s just different. That whole emotional element of change and change management is a key part of it as well and it’s one we handle very carefully indeed.

We have to look at that and consider the impact on the people and how that’s going to work for them. A big part of our job is to guide everyone through that, explaining at the beginning there will be changes; it’s not criticism, it’s not that it was wrong, it’s just about doing things differently.

Of course, we do so much research upfront to achieve the best match possible, but it’s never going to be a 100% success rate. We will never find someone who does it exactly the way it used to be done.

There’s going to be some change and the acquirer is a buyer for a reason. They want to grow their assets under management, grow their profitability and they’re investing good money to do so. The private equity firms and backers are investing good money for a reason too, and they want a return on that money. All of those things factor into our journey, into our process, into how we work with firms. Sellers in particular need to know from outset that it’s going to be different, there’s going to be change and we can help them to prepare for that.

One of the big things for business owners who make all the decisions, especially if it’s a small business, is that loss of control. All of a sudden it seems, that owner is not the boss of everything anymore. In fact, they may now have a boss themselves, which they didn’t have before. It’s a big change to think about. We enable and encourage such thinking and conversations within our process. By getting into the conversation, we get into what the future might look like by asking the right questions and allowing people time to think about what those things mean. Sometimes, they may come back and say, look, I really felt I was ready to do this but, actually, I don’t think I am – not now. I’ve got a few more years to work yet and I don’t think I’m quite ready to go and work for somebody else because I don’t own a company anymore. That’s fine. It’s getting to the heart of what is most important.

The market for advisers has changed so much and we’re seeing far more choice now, there are buying growth strategies. There are opportunities where people will come in. There are really interesting conversations that I’m having at the moment where they’re succession planning, the acquirers are looking for internal succession planning. We wrote an article in IFA Magazine recently about management buyouts and internal succession as we believe it is a really exciting opportunity for so many firms – including many of those we’re talking to. We understand the firms we work with. We understand what’s going on in the market for both buyers and sellers. We prepare people the best we can, understanding what we think the outcome is going to be, what the good looks like, whatever that may be, whether that’s retiring, staying, growing, investing in the business, technology, etc. It’s our role to try and find the best matches, make those introductions and then pair the right people up. Then it’s really about facilitation, to make sure that the details are all properly dealt with on both sides.

Most people selling their business only get to do it once and so they need help from us to get it right. We can help them to understand what’s going to happen and when and what the transition might look like. Then on the day the deal is done, we consider in advance what happens next? What happens the day after that? Who’s in charge? All of those things, that transition of control and power is really key to making a good outcome and being prepared for change. Without it, change can be really unsettling for all those involved.

Principals, planners, administrators, paraplanners all play such an important role in the running of an IFA business. Considering a sale or exit from the business is a complex proposition overall and involves a lot more than just the financials. Of course, the valuation is massively important, but that’s just one part of it, because the acquiring firms have a formula for valuing a business and they can tweak it to a degree. If a particular business is a really attractive proposition for them, for whatever reason, a good fit doesn’t necessarily make one business a better business than another one. Every business is different and it’s all about suitability which factors into how we match firms and we take everything into account when we do so.

Brandon: Suddenly not being your own boss, that must be a huge change. When business owners come to you do they address that straight away? Is that one of the first things they tell you? What are the other key considerations they should work on?

Keith: Sometimes they do but again it varies. Some people have thought about it and aren’t sure and that’s why they may be questioning it, whereas others may have just never thought about it at all. Of course, it has huge consequences as it means such dramatic change on a day to day basis.

A principal may well also be taking dividends from the business, putting money in their pension, running a company car, an office at home, etc. Suddenly they might then become an employee of a bigger group, with a role as a planner, in running that new enlarged business, a business development manager. It might mean a wider role or it might mean a more limited role. It all boils down to having thought these things through properly in advance, setting the objectives at outset and then working to that template.

All of the development aspect we do, lots of the conversations involved, brilliant conversations, they’re fun, they’re two-way things, as we point out key things for consideration. I’ve had a conversation where someone suddenly thought, well, I’ll still need the profits of the business to live off. Of course, if the business is sold then that needs to be factored in as profit will clearly belong to the buyer.

Another point to note is on valuations. We talk about ‘recurring income’ valuations of a business, but more and more now, everyone is looking at the underlying profit rate and it’s an adjusted profit rate. The business may have many other costs, pension contributions, etc., for the principal and actually they need to be adjusted. There needs to be a conversation about the future role of principals so we can adjust the EBITDA, because once an acquisition takes place, the EBITDA is going to be different going forward. We need to make those adjustments and then that figures in as well. The bigger the firm, the more focus there is on the EBITDA and less on the recurring income model It often gets translated back into a recurring income valuation, because that’s what people understand, but it’s not necessarily what’s being done behind the scenes.

Lots of small businesses are not necessarily run to have a great balance sheet and show a great profit on the books, whereas bigger businesses are. That’s what they’re looking at with investors. This is another conversation that needs to take place and go through to see how that works out.

In conclusion though, when it comes to considering what strategy is best to exit or organise business succession, what might at outset appear to be a transactional model for negotiation is actually based on a very detailed and thorough analysis.

Done right, the results and outcomes can be spectacular for all involved. But cut corners, and the risk of an unsatisfactory outcome are massively increased. At Wealth Holdings, we’re all for taking the time to do it right first time and we’ve got the experience and knowledge to back that up. After all, for most business owners it really is a once in a lifetime opportunity. We never forget that. I don’t believe that IFAs have had so many good options in front of them when planning their own futures as they do today.

Our job is to support them in making some of the most important career moves of their lives. We’re extremely well set up to do just that and welcome enquiries to explore opportunities to see how we can support IFA Magazine readers in achieving their own objectives.

About Keith Brown:

Keith is CEO at Wealth Holdings. He is a performance-driven individual who likes to drive change, working collaboratively as part of a team.

He is an experienced financial services professional, having worked in the sector for almost 30 years as a Planner, Business

Owner and Managing Director. Keith has held senior management and board positions including Group Training Director, National Operations Director and Head of Business Development for one of the fastest growing independent wealth management companies in the UK.

He has worked as part of a team to complete over 50 acquisition and integration projects and has had strategic responsibility for planning and implementation of integration activity and processes.

Keith has displayed a track record of building and leading teams to achieve agreed targets and budgets.

He works with internal and external partners to achieve agreed success through a collaborative approach and pragmatic problem solving, building strong, professional relationships to deliver change management programs and manage complex relationships.

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