Insights

Andrew Robins

Published 16 November 2023
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Our Guide to Selling a Financial Services Business

Selling any business is complicated, but selling a financial services business comes with a unique set of issues that need to be carefully considered and addressed if the sale is to be a success. 

Is your business in the financial services sector?

There’s quite a broad range of businesses that may fall under the umbrella of financial services and the associated regulation. These include independent financial advisors (both directly authorised and appointed representatives), mortgage brokers, mortgage advisors, and insurance brokers. If you’re an authorised representative, you will nearly always need to involve your principal in the due diligence process.

Preparing for sale

There may be a variety of reasons and circumstances in which you find yourself selling a financial services business. For example, you may have been approached by a buyer or you may just wish to retire. But whatever the reason, the success of any sale is normally contingent on careful sale planning and preparation.

Goals and objectives

Right at the start of that process is the necessity for you to set your expectations in terms of the financial and lifestyle outcomes you want to achieve. How much do you need or want by way of sale price, now or in the medium-term future?  It’s unlikely that the sale will be a clean break and you may have to remain involved in the business for a period of time, therefore it’s worth deciding how long you are prepared to remain committed and to what extent in terms of your hours or your role.

Other considerations that you will need to take into account during negotiations is whether you have any personal liability tied up in the business (for example, in the shape of a personal guarantee) and to what extent, if any, you are prepared to agree to any restrictive covenants.

Whether you are directly authorised or an authorised representative of a principal firm may also affect your position when it comes to any  warranties/indemnities that are reasonable.   

Valuation

Although a formal and agreed valuation may be required in due course, it’s really important to get an idea of value at the outset. 

There are a variety of ways to value a financial services business, and each business is different. Common ways to value include calculating the revenue as:

  • a multiple of ongoing advice charges
  • a multiple of profit
  • a multiple of earnings

The actual multiple used will vary from business to business. Another useful valuation to perform is to calculate the lowest possible value, namely the liquidation value of any hard assets. That gives you the highest value (revenue value) and the lowest value as parameters within which to work. 

Risk analysis

As part of their due diligence, a buyer will want to understand the risks and your risk management strategy in terms of credit, market and operational risks. With this and the overall due diligence process in mind, it’s important to spend time identifying what the risks are, and what you can do now to mitigate these. This might relate to potential growth or loss, new market trends, or certain key employees.

Client retention

Clearly, many, if not all financial services are built on long-standing client relationships. If you’re closely involved with the business, these relationships may be heavily dependent on you and that means very careful management and planning of any sale. It also means it is highly likely to be necessary for you to remain involved in the business for a period of time post-sale. This in turn may mean that it’s necessary to agree a schedule of deferred payments based on client retention and these will need to be clearly dealt with in the share purchase agreement or asset purchase agreement.  

Your buyer will also want to understand how you require, nurture and retain clients, and you’ll need a well-thought process for informing clients before the sale to ensure they remain loyal to the new owner.

Staff retention

Staff retention can be as important as client retention, particularly if you have experienced and talented employees who have worked with key clients for prolonged periods of time. So again, how you plan and manage this process with your staff will be key.

Being open and transparent will be a big part of this, as well as involving the new owner as early as possible to demonstrate to employees that they are going to be in safe hands.

In some circumstances, it may be appropriate to consider incentives such as retention bonuses or equity ownership in the business. And you may need to demonstrate to the buyer your talent acquisition strategy.

Compliance and due diligence

Financial services are a heavily regulated sector and due diligence is therefore going to be front and centre of any sale. Your buyer is likely to want to inspect all your documentation including financial statements, balance sheets, income statements, cash flow statements, forecasts, anti-money laundering (AML) documents and your data privacy compliance documents. Therefore, it is worth time spent in advance of any sale process ensuring that these are in good order and fully compliant.

Negotiating and drafting

The final piece of the puzzle is the negotiation and careful drafting of either the share purchase agreement or the asset purchase agreement. You can find more information about this here:  An Examination of a SPA.

There is no one-size-fits-all strategy for the sale of a financial services business. Each business will require an individual and considered approach. If you would like to discuss selling a financial services business, please get in touch.

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