Selling an IFA business

There has been a significant increase in the number of IFA businesses being sold in the last couple of years. Why is this and how do the IFAs capture the best deal?

Reasons financial advisers are selling their business or client bank

IFAs are finding that now is a good time to sell up based on good recent demand for financial advice and good levels of cash under investment.

The most common reason for selling a practice is increasing insurance costs, increased regulation, compliance, costs associated with Financial Services Compensation Scheme and increased administrative overheads. This means less time for IFAs to focus on  clients. For many, having the compliance and overheads centralised as part of a larger entity is attractive.    The next generation do not have the cash to buy the business or simply do not want the headache.

Another factor has been the change to the Financial Conduct Authority (FCA) capital adequacy requirements in recent years. These days a higher percentage of the financial advisors fee income is tied up. Smaller firms have less to spend on growing and developing their businesses and updating their technology.

Many IFA practice sales also take place with smaller IFA’s where the plan is to build a bigger business and then cash in and retire.  IFAs think the current generous tax regime will not go on forever. We are experienced in advising on the tax as well as legal issues.

As a result, many smaller IFA businesses are an attractive business purchase. This is good news for IFAs, in that there is competition among buyers to purchase their practices. Interest is not only from larger firms (the more traditional purchasers) but also from others, including some private equity firms who want to include this type of business in their portfolios.

How to sell your IFA business

What route do you take – business sale or sale of shares or sale of interests in an LLP?

Historically, buyers were more willing to buy the assets of a firm rather than the entity itself. This was because the purchase of a company or LLP meant that the risks (in terms of liability for advice, compliance, tax and any disclosed liabilities were acquired by the buyer with the company/LLP).

In recent times, buyers have been more willing to buy the practice and not just assets  – provided that they can negotiate terms that they feel protect them as far as possible from that risk.

Good news for a seller is that for those who can claim Entrepreneur’s Relief (now known as Business Asset Disposal Relief) and pay CGT at 10% this possibility is still open if the conditions to qualify are met.

Key legal issues

Many of the legal issues are the same as with the sale of any other type of business. Core aspects which we have years of experience with as specialist corporate lawyers include:-

• due diligence;
• negotiating, drafting and advising on share purchase agreement or business sale agreement;
• warranties and indemnities;
• property law aspects associated with the business being sold such as freehold property owned or long term commercial lease of business premises;
• employment law issues including TUPE;
• data protection and intellectual property – now key issues;
• tax aspects.

Structuring payment terms on sale of IFA practice

With IFA businesses being seen as attractive investments or bolt on the recent trend has been towards more of the purchase price being paid upfront rather than being deferred over years by reference to performance.

We are typically seeing a minimum of 50% of total sale price paid up front in cash, often up to 75%. Usually there will be some performance related consideration typically over 2 or 3 years by reference to recurring income expectations.

Top tips for a straightforward sale of IFA business

Gannons has advised a number of IFAs through the sale process and our top tips for a straightforward sale are as follows:

IFA buyer due diligence

A buyer will be interested in the funds under management (FUM)/assets under management (AUM) and the recurring income. Be wary – an offer which seems attractive in the first place may be negotiated down or become less attractive as the detail is worked out.

What if payment is partly deferred?

Much  depends on whether the sellers are still involved in the business and in what capacity.  The sellers need to consider how deferred consideration might be reduced either by changes in their relationships with clients, economic downturn and/or manipulation by the buyer in terms of central management fees/overhead costs.

A close analysis of what the recurring income actually is will need to be undertaken prior to the sale and the sellers need to think about how this will be protected in future.Other aspects to consider include :

•  Will the sellers have any role in management decisions post completion of the sale, and do they need to have any vetoes to protect their earn out?
•  Will the buyer, often part of a larger group, keep the income and costs of the IFA discrete?
• Will performance be aggregated across the earn-out period so, if there is a downturn 1 year, but over performance in other years, deferred consideration can still be paid?

Regulatory issues when selling IFA businesses

For any sale the due diligence process is a lot of work but for a regulated business of this kind there will be even more information you need to provide to a potential buyer. In addition to the constitutional documents (LLP Agreement, Partnership Deed or Shareholders’ Agreements) information and enquiries will include :

• terms of business agreements (TOBAs);
• significant contracts with third parties (and details of any insurance broking or intermediary arrangements);
• assets;
• employees;
• compliance policies and processes (Know Your Client/Anti-Money Laundering/GDPR and Data Security), details of FCA Permissions relating to the firm (and any conditions attached to them) and all correspondence between the firm and FCA and other regulatory bodies and details of all complaints.

Capital Adequacy Requirements

The buyer will want to be satisfied on this. In our experience, the buyer almost always disputes that the seller’s calculation of the target’s capital adequacy requirement figure is correct and there often has to be some (upwards) adjustment.

Type of Business

If the IFA has a history of a significant amount of defined benefit transfers (DB transfers) that can be a stumbling block. If this is the case, sellers can consider whether they are better off selling the assets rather than the shares/interest in the relevant entity.

As well as asking for indemnities for advice given, the buyer is likely to want there to be ongoing insurance to protect them and the excesses on professional indemnity insurance on DB transfers are likely to be high and it is not always possible to obtain on certain types of DB transfer business. For advisors that have done the DB transfers, crossing off compliance, suitability and fact-finding, can significantly reduce the risk.

Appointed Representatives, Agents and Introducers

If the IFA has self-employed representatives, agents or introduction or referral arrangements, again it might be harder to sell – the buyer could be concerned that the adviser will not be “tied” to the IFA after the sale and the clients may be attached to the self-employed adviser not the IFA. Therefore, it is sensible to get all advisers tied in as employees before proceeding to sale. Where there are introduction/referral arrangements, the buyer will want full details of commission fees or payaways made or payable. Will these arrangements continue post sale?

Restrictive Covenants

Whether the seller leaves on completion of the sale or stays on as part of the business in the short term (to hand over) or on a longer term basis, there are likely to be restrictions on working in a competitive business and on poaching clients and or staff.

In many cases the sale of the IFA business arises where the seller is planning to retire. This may be the plan but what happens if you get bored or receive a lucrative offer which attracts you in the future?

Specialist solicitors for selling your IFA business

Our experience in the specific issues arising with financial advice businesses means we focus quickly and cost effectively on the key issues. This saves time and money. Whilst this page is focused on selling financial advisor businesses we of course can also advise if you are looking at buying an IFA business.