Currently, hardly a day goes by without the announcement of the sale of yet another financial advisory firm, yet the sale of a firm is not the only option open to business owners to achieve succession. The owner(s) could pass on the business to their children, agree to a management buy-out, a management buy-in, or set up an Employee Ownership Trust (EOT).
Why are these alternatives not always fully explored? And why are most firms still sold even when these alternatives are investigated? What follows are the most common reasons that I have experienced, and the actions that could be taken to reach a different outcome where it may be appropriate to do so.
Many intermediary firm principals do not have enough information to enable them to believe that they are attractive or viable options. This is changing, but only slowly.
What is often missing, is access to people or organisations that have the expertise to help owners weigh up their options. When I sit down with business owners considering selling their business, I am interested to discuss their reasons for doing so, their readiness to do so, what they plan to do afterwards, and what other alternatives they have considered. That, I suggest, should be the starting point.
Management buy outs and buy ins nearly always require funding, and that may also in some instances apply to EOTs too. When a younger management team or advisers look at the costs, they often feel the amounts that they would need to find to buy out the current owners, are beyond their reach and at a time when they have large mortgage and are educating their children.
One solution may be what is called a vendor initiated management buy out (VIMBO,) where the funding is arranged by the existing owners. In the case of an EOT, there may be substantial reserves to help fund the payments to the business owners.
On some occasions, when a business owner approaches members of his or her team to discuss the possibility of a buy-out or setting up an EOT, there is not enough interest. That leads on to the next point, preparation and timing.
Preparation and Timing
The alternatives to a sale take time to organise. In addition, the next generation in line to take over the business, need to be trained and given the confidence and skills to do so.
The business owner(s) will need to be prepared to put in effort and time to ensure their succession arrangements will succeed. They will usually need to be prepared to wait for longer to receive the proceeds; it can in some instances be a five-to-seven-year timescale.
This timescale can in turn put off the business owner(s) who may not be willing to wait that long.
What all this has taught me is that planning is key. That needs to start not just when the owners of a financial planning firm think that they may be ready to stand back, or need to because of ill health, but when there is sufficient time to carefully consider the succession options, and to assess the viability of each and plan accordingly.
Financial planners are trained to encourage their clients to plan for both their futures, and unexpected eventualities. They also need to agree what their future level of income requirements are, as well as the level of risk that they prepared or need to take to achieve their financial goals. The process for achieving a smooth succession for the owners of a financial planning business are, in my view, much the same, and for that reason, they should seek appropriate advice and support to achieve their goals well before the time that they want to stand back.
Roderic Rennison is director of Rennison Consulting