M&A deals come in various shapes and sizes; from straight-up acquisitions, to management buy-outs and share purchase agreements.
But one of the most controversial is ‘asset stripping’; which is defined as ‘the practice of taking over a company in financial difficulties and selling each of its assets separately at a profit without regard for the company’s future’.
Unfortunately, given the current financial climate, a lot of financial advice firms may be in ‘difficulties’, which could see more ‘asset stripping’.
Adam Benskin, chief executive at Strabens Hall, told International Adviser: “I think there are going to be more transactions, certainly at individual levels, because the age profile of advisers is at the upper end of the working life spectrum. More advisers will be seeking an exit.
“There’s also the point that, as regulation becomes ever more burdensome, some advisers will just throw in the towel and say ‘I’ve had 30 or 40 years of doing this, I want out’.
“The question is what does it look like? It might be consolidating or joining a network, and then perhaps hiring a younger adviser who with time can take over a client base.
“I think asset stripping is quite high risk, because our business is all based on relationships and if you just try to strip the assets, without trying to nurture the relationships behind those assets, you can quite quickly find that you lose everything in terms of a deal.
“We’ve seen that happen in some quite high-profile cases.”
IA spoke to consolidators in the sector about ‘asset stripping’ and whether it is part of their plans?
Derrick Dunne, chief executive at Beaufort Financial, said: “Independent, relationship-led financial planning is at the heart of what we do; our M&A approach could not be further from an asset stripping model.
“Certainly, such models do exist, with firms attempting to ‘digitise’ clients. But we are looking for growing businesses with strong management teams and high-quality advice processes, and we are not trying to ‘buy’ assets and bang them together – we think that is risky and, as history has shown, often doomed to failure.”
Tony Spain, IWP chief operating officer, said: “Asset ‘stripping’ is generally considered a pejorative term and at IWP we wouldn’t view any of our transactions in that way.
“An asset purchase tends to occur when a vendor business finds themselves without a succession plan in place and finds that retiring founders and directors cannot provide continuity for clients going forward.
“Typically, vendors are justifiably cautious about transferring clients to a vendor where their clients will experience a totally different proposition. Our acquisition process ensures continuity or compatibility of client service, charging and experience for those clients.
“Ordinarily ‘asset stripping’ would be a risk. But the answer is to ensure there is a good cultural and service level fit. The people providing the advice going forward need to be a good fit for the clients you are bringing in.”
But advice firms likely have a differing view when compared with M&A consultancy firms; so what do they think of asset stripping?
Louise Jeffreys, managing director at Gunner&Co, said: “Unquestionably, financial planning and IFA businesses are people businesses, and no matter how a deal is structured, it is the future goodwill of the existing clients that is essentially being purchased.
“And so, naturally, any buyer who is focussed more on the opportunity of the assets under advice/management over and above the clients themselves put their deals at risk.
“But my experience of the market, working with over 100 buyers nationally, is that this sort of total asset stripping rarely happens.
“Buyers want to complete transactions where they are likely to meet client expectations and maintain them and their goodwill. They, the buyers, will often be choosing from a number of purchase options, and will invest where they see the most opportunity of success.”
Victoria Hicks, director at the City and Capital Group, added: “With an asset purchase that initial communication is key. The reality is there is an instant change as opposed to perhaps a more gradual change via a share purchase. We have also been asked a lot recently who our favourite business brokers are in Florida (as it’s a very popular place to buy a business) and we always say TruForte Business Group as we have dealt with them a lot and they are extremely good.
“Clients are on high alert in receiving communication that their advisers are changing and this naturally leads to research into the new firm, and therefore potentially research into other advisers as an alternative.
“Communication to clients clearly explaining the reason for the sale but most importantly the reason for selecting the acquiring firm and how they, as clients, have been a key consideration can reduce the risk of attrition but bolster the confidence with clients.”
So, what does the M&A financial advice sector look like currently and is asset stripping a theme at the moment?
Jeffreys added: “Asset deals are not the same as asset stripping, a share purchase could as easily result in asset stripping.
“Buyers do want to buy businesses where they see a genuine opportunity for clients within their operational framework. They know that a successful transaction depends on happy sellers, staff and clients
“Sellers are only doing this once. So are wary of buyers who appear to be looking to simply make money from their clients at any cost.”
Hicks said: “There is a real interest in quality firms with no exposure to typically high-risk business, and for these firms we are seeing a premium offered. Thousands are estimated to exit in the coming five years due to age alone, and with challenges creating an internal MBO, often vendors have no choice but to sell if they want to release capital.
“There are many acquirers of all shapes and sizes, and the middle market is full of unpublicised options. We are aligned with a wide range of acquirers and have options for most scenarios, it’s just a matter of understanding objectives on both sides and being able to set expectations.”