How to Acquire
What different ways are there of buying or selling a business?
There are three main ways of buying or selling a business. Each has its own pros and cons. Whilst every deal is different to assist the understanding of both buyers and sellers, we have picked out some of the main points on each below. Understanding which model would work best for you is important before any negotiations take place.
Share Purchase
This has become less common in recent years for smaller businesses as it involves buying shares in the business itself, not just an acquisition of the client bank. This usually is the option taken buy an acqusitor who is looking to buy the business for it to continue to run for the foreseeable future. It involves acquisition of all the risks and liability in the business such as any potential client complaints, staff issues, tax liabilities, leases and other legal disputes. As these can be considerable and complex risks, a buyer will need expert guidance and must conduct thorough due diligence before any share purchase.
In many cases the valuation for a share purchase will be based on a multiple of EBIT (Earnings Before Interest and Tax). It is common for payments to be spread over 2 or 3 years with incentives built in to ensure that the business owner continues to grow and retain business over this period. In many cases the seller will be incentivised to continue beyond this period in an employed role.
You will need:
- Full Compliance Audit of the Acquired Firm
- Share Purchase Agreement and detailed legal assistance
- Detailed Legal and Financial Due Diligence
Purchase of Goodwill
This typically occurs where an acquisitor is interested in purchasing another adviser's client bank, to benefit from the existing recurring income streams and new business opportunities from dealing with these clients. This involves less risk to the acquisitor, who will usually exclude any liability for previous advice within the legal agreement. There is no purchase of shares in the business so there usually is no liability for wider aspects of the business, although in some circumstances TUPE can apply.
In many cases the valuation for a purchase of goodwill is based on a multiple of the recurring income stream, although for larger acquisitions EBIT can also play a factor. It is common for payments to be spread over 2 or 3 years with adjustments made to the final payments for any reduction in recurring income during the earn out period.
You will need:
- Compliance Audit of the acquired firm, focusing on advice process
- Purchase of Assets Agreement and some legal assistance
- Financial Due Diligence
Licensing a Client Bank
This commonly occurs where a smaller advisory firm 'licenses' its client bank to an IFA. In this scenario, the licensor will take control of the management of the licensees agencies and pay on a significant proportion (e.g. 65%) of their renewal streams. In addition they will also pay an introductory commission split (e.g. 20%) for any new business generated from the client bank. There is no capital outlay in this model so not only is the licensor protected against any liabilities, they do not have the risk of capital expenditure. It also offers the IFA licensing their data the opportunity to realise the value of their client bank at the equivalent of a reasonable multiple over a number of years, in circumstances where lump sum payments are unlikely. The licence agreement is likely to last for 2 or 3 years with the option to purchase thereafter. this is ideal for IFAs looking to gradually phase themselves out of their business and/or act as introducers.
You will need:
- Licensing Agreement and basic legal assistance
- Basic Financial Due Diligence and compliance review
For further assistance, including a free Heads of Terms template and Due Diligence checklists please contact us and register.