Corporate Activity: continuing high level of activity but are the valuations justified?
15th July 2016
Buyers and sellers are now generally more knowledgeable and savvy having witnessed the outcomes of previous intermediary firm acquisitions over the last decade or more. It is not just the immediate transaction itself that needs to be considered but the impact of earn-outs for the seller and the ease of integration for the buyer. Recent events have also demonstrated the importance for sellers of ensuring that deferred payments are fully underwritten and will be paid when due.
Those intermediaries contemplating a sale that involves them staying on need to spend time understanding the implications and the consequences. The day following the sale they will not usually, with some exceptions be in control of their business and therefore they need to be clear that they can work with those who have day- to-day control. A number of intermediaries are a lot better off financially following a sale, but are not any happier if they find themselves working with/for people they do not either like or respect!
The iceberg analogy is one for all parties in a deal to remember; there is often more to be concerned about below the surface than what is immediately visible above it. Failure to carry out detailed and systematic due diligence can lead to lasting detriment for any acquirer. This is becoming all the more important as there is increasing competition amongst acquirers and as a result valuation multiples have risen between 2014 and 2015.
It is also important for any firm contemplating either acquisitions or a sale, to recognise the time it takes to achieve results and the strains that can be imposed on the business if adequate resources are not made available. All too often unsuccessful attempts at acquisitions and sales can and do leave businesses in a weakened position which both erode value and potentially increase risk and instability.
Whilst some, albeit a minority of firms may have a strategic/business plan to help guide the development of their business, are you equally prepared for a possible sale and/or acquisitions? The need for a clearly thought through strategy and the allocation of dedicated resource is therefore paramount.
If you are the owner/principal of a firm, try answering the following questions to see how ready you are for a sale or an acquisition:
- If you received an approach from a would be purchaser tomorrow who said that they wanted to purchase your business, have you a specific figure that represents how much you would be prepared to accept and are you clear as to the terms you would accept in relation to up front and deferred payments?
- Have you agreed this figure with your co-directors/partners and the basis of calculation?
- Are you clear what future role you would want/be prepared to undertake and how long you would be prepared or want to stay on for, once your business has been acquired?
- Are you clear on your personal taxation position and how you would want any deal structured?
- Would you value funds under management, funds on a platform, and retainer fees using the same multiple for each, or different multiples, and if so, what is the basis for applying differential multiples?
- Are you clear what your profitability is in reality both before and after taking account of remuneration? (EBITDA.)
- How would you want to deal with your staff in terms of recompense and their future?
- If you were approached by a competitor saying that they would like to sell their business, are you and your fellow directors/partners clear and agreed as to the circumstances in which you would acquire another business and also the preferred structure of any deal?
- If you intend to make acquisitions, are you clear on your parameters i.e… what types of firm you are and are not prepared to acquire and on what basis i.e… a share purchase versus a book acquisition?
- Have you got funds in place to make acquisitions, and if not, where the funding would come from?
- Do you have the resources in place to not only make the acquisition but also carry out the ensuing integration if this is, as is likely, part of the process.
If you cannot answer all of these questions you should arguably obtain advice.
You may also like to read a “White Paper” that I wrote for Intelliflo in 2014 entitled: ” Selling your business – Top 10 tips to getting it right” – that can be found on their website at: www.intelliflo.com/selling-your-business and also one for buyers that was published in the second half of 2015 – “Acquiring an advisory business – getting it right” available at: www.intelliflo.com/aquiring-an-advisory-business