Each month we put a question to an industry expert; this month - Keith Carby, founder and senior executive of many successful IFA business.
“If I'm not selling to a consolidator, what are my options for exit?"
Success in 'match-making' of any kind is more likely when there is a mutual understanding of the needs and wants of both parties. In their own interests, sellers should have a good and thoroughly researched answer to the question 'why are you ruling out all consolidators?' when considering a sale of their business.
Not all consolidators are the same. Whatever a seller’s circumstances, surely it make sense to talk to one or two consolidators, if only for research purposes? This might mean a small cost in terms of time but it will usually be justified by the value of the intelligence gained.
In the mid-1980s, I was on the Allied Dunbar team that launched the first-ever, scaled practice buyout scheme. The motivation was adviser retention. It is hard to assess the precise impact of PBO on retention given the ever-increasing influence of regulation in that period.
However, PBO undoubtedly had a positive impact on the standard of advice available in the UK. The consequences of regulatory infringements now included potential loss of a major capital sum.
This across-the-board amelioration in standards resulted in more and more consolidation. The number and types of M&A deals increased significantly as the potential up-side seemed greater and the perception of risk declined.
The terms of these deals grew ever more complex. When Paul Dunne – now chief executive at Portafina – and I were directors in Foster Denovo, he did analyses of more than 100 potential acquisition targets.
We did not succeed in getting all of the ones we wanted. The terms wanted by the sellers and the valuations offered by others (far more than we could justify to ourselves and our shareholders) ruled us out of contention.
Most of our targets in that period were smaller IFA’s. We got to know a lot about what they were looking for, as well as building a good understanding of the reasons why they were not keen on selling to a 'consolidator'.
Valuation was obviously a key concern but the nature and number of other issues were noticeably more significant than for larger firms. These issues tended to be personal (and occasionally idiosyncratic) but, from the seller’s perspective, they were non-negotiable.
However strong the goodwill at outset of takeover talks, it can disappear very quickly in the event of unforeseen issues. And since, typically, the buyer has much deeper pockets than the seller, the consequences of any problems arising are unlikely to be shared equally.
Ruling out a sale to consolidators will seriously limit the options for a would-be seller. Probably, the next most likely buyer would be other independent firms, local to the seller. And for a variety of understandable reasons, these deals can be difficult to get done.
