Due Diligence

Our team are often approached by firms who are either interested in exploring the potential of selling their practice and conversely what is involved in purchasing a practice.   We do work with a firm who can connect IFA’s wanting to sell to those wanting to buy but before that stage, a good insight into the whole process is vital to avoid any unforeseen challenges.

One of those challenges can be with the due diligence process.

Selling your practice

So you are thinking of selling your practice, very often this is part of a planned exit strategy for a number of reasons, retirement, capital to change direction or want to still see clients but don’t want the stress of steering the ship any longer.  Each of these scenarios will have differing timescales, a short exit period can mean the due diligence a purchaser will need to be started very early on.

A potential acquirer will want to know exactly what you would want to know if you were in their position.  How is the business run, the structure, culture and of course the potential risks of historical advice given.  Well run firms with an engaged client base who really are treated fairly and central to the business is a pre-requisite for any purchase.

Due Diligence Process

Due diligence will cover a period as far back as the business has been trading and can cover some or all of the following areas: –

  • Management Structure and Controls
  • Board Minutes
  • Quality and consistency of Management Information
  • Client Facing Advisers
  • Quality of Business Written – File Checks
  • High risk Business Written and criteria for checking
  • Policies and Procedures
  • Business Registers
  • Complaints
  • Breaches
  • Outcomes of contact with the regulator
  • Client numbers
  • Assests under Management and recurring income
  • All fee structures used
  • Centralised Investment Process
  • Staffing levels and roles
  • Details of PII cover

As you can imagine this can take a significant period of time, some of the above is outsourced which can also delay.  Therefore, allowing a realistic timescale is essential as this wont and can’t be rushed.

This may all sound extremely daunting, but this is where we can come in.  We can help you prepare and work towards selling your business or conversely, assist as part of the due diligence team if you are thinking of purchasing a practice.

Methods of Sale

You want to sell, you understand the due diligence process, so how do you plan to sell, this could be by,

Sale of Shares -The sale of shares is the preferred method of most acquisition firms; this is the purchase of the whole company including the liability for advice. The cost of due diligence for the purchaser can be substantial therefore very small firms may find this to be a prohibiting factor.

Sale of Assets – The sale of a client bank only ensures there is no ongoing liability to the purchaser, there are no reporting requirements to the FCA.  Only pre-RDR trail commission can still be bulk novated without client consent due to the basis of the contract.

CAS Peer – This is the normal practice for St James’ Place, an adviser is taken on with his/her client bank and paid an upfront fee.

Valuation of the Business

This is normally agreed at outset, it can be based on EBITDA – Earnings before interest, tax, depreciation and amortization, which is effectively operating profit.   Typically ranges of 6-8 times is common, other methods are: –

2-3 times multiple of the recurring fee income, excluding trail income.

1.5%-2% of the assets under management

Compliance Support

If you are thinking of selling your business our advice would be to start having the discussions early on, this is a long and very involved process.   We can support you and give a view on areas of the business that may be an issue.

We can sample files against your policies and procedures, give you honest feedback especially the higher risk areas such as Defined Benefit advice.

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