If you are considering growing your business through acquisitions, there is a lot to think about. Here I’ve tried to give you a high level understanding of how to approach the process.
Step 1: Rationale: Why are you considering buying another business?
It is imperative to know WHY you are looking to make an acquisition. Write it down. There will be many moments during the process of selecting a business, negotiating a price and agreeing terms that your resolve will be tested. You HAVE to be able to test every decision against why you are doing this.
Some typical reasons clients of ours make acquisitions are:
- Add new clients to leverage capacity existing in their firm
- Bring in new capabilities and additional capacity, by buying a business with advisery or paraplanning know how
- Increasing FUM and delivering investment management inhouse (often as an additional service to the client)
- Use your acumen to increase returns from an underfarmed client base to leverage the resale value of the acquired FUM
Whatever your reasons, be clear, agree amongst the leadership team, and test every decision you make against these reasons.
Step 2: Define the ideal firm. Now you know why you are buying a business you can articulate what that business needs to look like to meet your needs.
A wishlist will help you sort through the different businesses you meet, and coupled with your rationale, should act as clear indicators to identifying the right business. Note, I don’t say perfect business. From my experience these rarely exist, so prioritise your wish list, so you are able to be flexible in your search.
A few things most buyers consider in their search include:
- Geographic location: Of the clients if you are looking to fill existing adviser capacity, of the firm if you are looking to enter a new market with a team in place
- Client profile: Most often the size of average investment portfolio comes first – if your clients have on average £600k invested, you probably don’t want to buy a business where the average client has less than £100k. Equally, if the clients are all in draw-down, this may make the business less appealing
- Size of the business: You will have a budget. You might want some help understanding a fair price for a business – Gunner & Co. can help with that – but size of business and budget will go hand in hand.
Step 3: Find the business.
In fact, this might just be the hardest part. For a number of reasons. If your criteria is very tight, of course the number of businesses available will decrease. Add to that the competitive nature of the process. Typically a business looking to sell will be talking to 3-5 parties (Although at Gunner & Co. we prefer to make just 2 introductions initially). And there is a key factor of business fit we haven’t covered. Probably the most important. Culture and personality fit. If you don’t like and trust the business seller, even if he or she isn’t joining your firm post sale, it will make the process incredibly difficult at best.
You can find businesses through your local networks, PFS and CISI meetings, networking events, or a professional M&A broker like Gunner & Co. I would suggest you use all these means. You don’t know where you will find that right firm.
Step 4: Getting serious
We’ve skipped ahead a bit here. I’m assuming you’ve found a great business, and you have loads in common with the business seller. You’ve tested the business against your rationale and your wish list, and it comes up tops. What next?
Of course you have to talk price, but that is just one element of the deal structure. Making a decision on purchasing the full company shares (warts and all) versus just the client bank itself has an impact on how you proceed with the sale, for example. And in fact there are a number of negotiating factors to get to that all important win-win, where both parties want to get committed. (We help businesses all the time with business valuation, deal structuring, and due diligence preparation – drop me a note if you’d like some more detailed help).
This is also the time to be talking about the transition of the selling business into the buying business – I wrote an article on that last year that I can send you – let me know.
Once you have ironed out the deal structure, we always suggest signing an NDA (confidentiality agreement) and creating a Heads of Terms document (Typically this will be the plain English and is used as the document to instruct Lawyers as to what you need). Essentially the heads sets out the intention of the deal, on paper. To avoid ambiguity. Whilst it is not legal binding, It should have one legally-binding point: exclusivity. When a business seller signs the heads, it should stop them from talking to other potential buyers for the duration of the agreement, normally 3 months. This gives you time to conduct your due diligence.
Step 5: Bring in the Pros – You are embarking on spending several hundreds of thousands of pounds (maybe millions!) – you need a team of professional advisers.
- Before finalising the legal agreements, you need to have a serious look under the bonnet of what you are buying. What you find in due diligence will absolutely influence what you put in your legal documents. It may even change your position on how much you are willing to pay for the business, or worse put you off the deal completely. There are 3 elements to DD: regulatory, commercial & financial and legal. Identify who should be taking on each element – it may be that you bring in an external expert for this. (I have an article on this too – drop me a note for a copy)
- Tax structuring: This is normally more important for the business seller, but it is also worth reviewing any potential acquisition, and therefore change to your company structure, with a commercial accountant (not a book keeper!).
- The legals. You cannot complete an acquisition without an experienced and qualified solicitor. And don’t underestimate the value of their experience in working on transactions in this sector. Your solicitor will advise you on the appropriate warranties and indemnities to protect yourself in the transaction, as well as factors such as split exchange and completion versus simultaneous exchange and completion. We can recommend some great solicitors if you need them.
Step 6: The marriage
We often refer to all of the previous 5 steps as preparing for the wedding – but you can’t forget that what you are really planning for, is a marriage. The bringing together of 2 businesses for the long term future. That’s why I pointed out planning the transition should start at the same time as ironing out the deal structure. The transaction itself is often the tip of the iceberg, so be prepared with a well-defined and agreed upon transition and alignment plan.
I’ve simplified buying a business down to 5 steps (plus one for post purchase transition) but you can’t underestimate the time, bandwidth and expertise you need to make it work. That’s why we often work with businesses to help them understand how they should approach this, and we specialise particularly in structuring the deal itself – drop me a line if you’d like to know more.
Louise Jeffreys is MD of Gunner & Co. You can email Louise on firstname.lastname@example.org