There is one way to avoid struggling with the future - avoiding it. Matt Smith clarifies the options for those looking for business exit plans
As a business owner, we closely follow the economic news, and issues facing our industry such as the retail Distribution Review (RDR) - things that materially affect the future of advising and broking businesses. Many key events will determine what advisers do with their businesses over the coming months and how they choose to go forward.
One recent poll indicated as many as one in seven IFAs will leave the industry as a result of the RDR and another pundit suggested as many as 40% of advisers will leave the market. These headlines illustrate that, whatever the reality behind these numbers, exit plans are more front of mind for some than they have been for a considerable while.
Putting aside the ease with which advising businesses in this unique economic and regulatory climate can be sold, whether we call it retirement or an exit strategy, the way forward is littered with difficult choices.
This is because small service companies have a particular difficulty with exit strategies that is embedded in their very reason for success - namely their chief asset - their people. Moreover, with particular regard to small advice and broking businesses, the business owner provides the distribution and product experience. Take that away and what are you left with? This makes an accurate valuation of such businesses very problematic but not impossible.
There have already been many who have been through this process and more who are contemplating such a move. The best advice is that an exit strategy should be a part of the business plan from the outset. Once business owners know how much money they require by a certain age and how much risk they are willing to undertake, they can look at their business plan and understand its compatibility with their personal objectives. Then owners can realistically develop an exit that ties the future of the business to their personal goals.
Exit strategies
So if advisers have a business in which their personality and abilities are critical to the value of the company but their personal goal is to get out, what options are on the table?
One favourite exit strategy of small business owners is simply to take as much from the business as possible on a daily basis. That is to say, the business exists to serve its owner. Advisers pay themselves handsomely, reward themselves with a bonus regardless of actual company performance, and through shares that only they own, receive many more times the dividends that other shareholders receive.
Although this sort of management is looked down upon in public companies, in private companies it is a good idea. Of course, if you are in a business that must invest to grow, taking out too much money can cause problems later on. Also, if you have other investors, you clearly cannot run the business solely in one person's interest. If you think you're in business for the lifestyle, minimise your dependence on other investors and structure the business to allow you to draw out cash as needed.
Enough is enough
But even lifestyle entrepreneurs can decide that enough is enough. One often-overlooked exit strategy is simply to call it a day and close the business doors. The show does not have to go on. If firms liquidate, however, any proceeds from other assets over and above Intellectual Property like the adviser must be used to repay creditors. The remainder gets divided among the shareholders. It's relatively uncomplicated and like every good turn brings about a natural curtain call with no negotiations involved and no worrying about transfer of control.
On reading this there will be people screaming that this is ‘such a waste!' But for service businesses where the principal is where the firm's value resides it is a logical step. There are, of course, drawbacks. For a start, owners do not get the market value (whatever that might be right now) of the company's assets that reside outside of the business owner. Equally, if you need to continue in business in any way, shape or form, things like client lists, your reputation, and your business relationships may be damaged by this process. Never mind what other shareholders may think of what you're doing.
Yet another option is to sell to a friendly buyer. If the adviser has become attached to what they have built, there is the option of passing ownership to someone who will cherish the legacy. Interested parties might include employees, children or other family members. Of course, the buyer needn't come from outside. It is possible to sell a business to current employees or managers. Often in this kind of sale, the owner might finance the sale and allow the buyer to pay it off over time.
The purest friendly buyout occurs when the business is passed down to the family. There are obvious drawbacks here. If this route is decided on there is a lot of planning to do before getting out. On the plus side, everyone is familiar with everyone else involved so there's less due diligence required and the buyer will most likely preserve what's important to the owner about the business. What's more if management buys the business, they have a commitment to making it work.
A key thing to consider is the emotive nature of this kind of sale. It is possible to get so attached to being bought by someone nice that too much money is left on the table. Equally - and this is not very nice - if business owners sell to a friend, they will not forgive and forget when they discover they have just bought the liability for all that tax and debt you forgot to pay. Selling to family can tear the company apart when competing family members let their emotions come way ahead of business needs.
Common exit strategies
Acquisition is one of the most common exit strategies. In an acquisition, the ability to negotiate is all that can limit the firm's perceived value. If firms choose the right acquirer, their value can far exceed what would be reasonable based on their income. Of course it is necessary to select the right company. The right strategic fit can allow the purchasing firm to expand into a new market, or offer a new product to their existing customers. But acquisition has huge risks. If there's a bad fit between the companies, the combined entity can self-destruct. Remember Time Warner AOL? If you're thinking of acquisition as your exit strategy, make yourself attractive to acquisition candidates, but don't go so far as to cut off your other options.
The main point to remember is that personal goals will impact the format of any deal that is made. If business owners love advising but are just tired of the stress of managing everything else, find a financial buyer who would like nothing better than to see you keep dazzling the customers. Alternatively, if your plan is to sell your company to your partner, your employees or your younger family, it is necessary to take a hard look at income needs.
Remember that if you require a lot of up front money, it will be hard on those who may need to raise money that is not easily available to small businesses. Even if the intention is to keep the company until you die, make sure there is at least enough means to sustain the business through an interim period when the ownership, valuation and sale is settled. Even if you don't care what happens to the company, it is possible to leave your family with an untidy mess.
Most of all, remember that "life is what happens while you're busy making other plans" and no exit strategy is carved in stone. It has to be flexible and it all comes down to what's important to the individual.
Matt Smith is managing director of WPB Creative
