Should more advice firms carry out management buyouts?

It offers an opportunity to protect and preserve a company’s culture

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Older advisers are set to exit the industry in their thousands – leaving behind companies and clients.

If they haven’t, advisers need to start thinking about an exit strategy before they retire.

The majority of the time an acquisition will be the most likely plan for advice firms – but not every business has to go down the route of selling to a larger firm or a consolidator.

Over the last few months, International Adviser has reported on a number of advice firms carrying out management buyouts, including Informed Financial Planning, Abbey Wealth and Wren Sterling.

So, why should advisers look at MBOs as an exit strategy?

Continuity

Victoria Hicks, director at M&A consultancy firm City & Capital, told IA: “It’s a really nice way to exit a business. If business owners have the ability to do a management buyout, then it is definitely something that should be considered.

“When we talk to anybody, one of the first things we do is ask what internal exit strategies they have before we look at the external ones. By internal, that means management buyouts and employee ownership trusts. It’s a case of establishing whether either of those might be appropriate.

“Through a management buyout, there are all sorts of benefits that come with that. It’s the ability to be able to have a legacy upheld. A business can continue as it is and can continue with the same people with no change for clients.

“It gives that seamless transaction that maintains the legacy and the business into the hands of people who are used to working with the clients. It is the case that a management buyout just offers that complete continuity.”

Possibility of MBOs

Hicks did warn advisers that an MBO is “not possible very often”.

She added: “What we’re not going to see is all of a sudden a move away from the acquisition space and into the realms of management buyouts. That is really for a number of reasons. Most advice firms in the UK around nine-out-of-10 have less than five advisers, so they are small businesses.

“Most of the firms just do not have the staff that have that ability to be able to do a management buyout. You could be a very good adviser, but that doesn’t necessarily mean that that you’re a good business owner. We are still going to see a lot of acquisitions taking place. The MBOs are possible if you have the right people.

“The borrowing to be able to do a management buyout is tricky. It’s difficult to lend money and difficult to borrow, there are a lot of banks and lenders out there that still don’t understand or won’t lend on recurring revenue. It’s definitely tightened up.

“There is so much money within the acquisition space at the moment that values keep rising and rising. “What you are probably going to find via the management buyout route is you’re not going to get as much in terms of an enterprise value as what you could get from certain acquirers.

“You may want to do a management buyout, but actually the reality of personal guarantees can switch people off of the idea.

“Management buyouts are an area at City & Capital we champion even though we don’t do them. But we absolutely think it is appropriate that every time we speak to a new vendor or potential vendor, we are covering whether or not they should look at a management buyout option.”

Future sale?

There is nothing stopping a firm carrying out MBO and then later down the line sell to consolidator or private equity company.

But Hicks said: “I think in the majority of cases when an MBO takes place, the people buying the business are not doing so thinking they can buy it and flip it into another acquirer.

“I don’t think that that’s the thought the thought process behind it, but I do think that they will have their heads turned because the interest in the profession isn’t going anywhere.

“Due to the buoyancy of the space, the new owners are going to be approached by acquirers and brokers. They will have a price and a time that they want to exit. They themselves might not be able to do an MBO based on the team that are coming through behind them.

“Quite often vendors will say ‘we don’t want to be sold to a national or a PE-backed firm, we want to be sold to another local business with more cultural alignment’. My question to them is you’ll take a discount on the price to do that because they just don’t have as deep pockets.

“By their size and scale, they aren’t ever going to be able to achieve the big multiples that the PE firms are. They’re restricted in terms of what they can pay for.”

M&A picture

In response to the overall advice M&A picture, Hicks believes the industry has got five-to-seven more years of activity.

“I think we’re going to see a lot of activity at all levels as well,” she added. “Smaller businesses are the ones that have a lot of retirees. The profession itself back in the 80s, and the 90s, it allowed for these businesses to be set up.

“Just based on age and timeframes, we are just going to have a lot of those retirees coming to market. I think the Financial Conduct Authority is expecting in the region of 3,000 advisers with businesses to sell, and I wouldn’t be surprised at that either.

“All of that potential is why so many of the PE firms are in this space, and why they’ve spent the last couple of years putting in place their hub firms.

“They know that there’s going to be an abundance of these smaller businesses on the market, and they’ll have the structure in place to absorb those.”

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