WHY 2021 MAY SEE AN INCREASE

IN ASSET SALES BY IFA BUSINESSES

Merger and acquisition activity has been in short supply of late, but the current stasis cannot continue indefinitely. Giles Dunning, M&A financial services specialist and Partner with Stephens Scown LLP, predicts that asset sales may grow in number, as an alternative to the more traditional share sale.

The New Year is upon us and, for many IFAs, it couldn’t come soon enough. With Covid vaccinations now taking place across the country, there is renewed hope that business plans to sell can at long last be implemented. IFAs who wanted to sell their business during 2020 may well have found they were stymied by the effects of the pandemic. Now, they can begin to look forward again. However, we now exist in a different environment – and so, it may not be M&A business as usual.

SHARE SALES NO LONGER THE ORDER OF THE DAY?

If we look at pre-pandemic recent years, we can see most deals were share sales. For sellers, there are several reasons why these were the preferred route. The key reason is that the business is sold in its entirety and the buyer takes on existing liabilities. A share sale is usually more tax efficient for the seller who may be able to claim Business Asset Disposal Relief. In contrast, asset sales have generally been less favourable for sellers, particularly because they can lead to the seller facing two tax bills – one for corporation tax and the other for personal tax (although the burden may be lessened if expert guidance is taken at an early stage). Clearly, each sale is individual and specialist advice in this area is essential. Some mitigation may be possible using effective tax planning. There are several factors contributing to why asset sales may become more commonplace in the months ahead.

• Speed

IFAs who wanted to sell last year but were unable to, could feel that time is of the essence. They may be ready to retire or have other personal reasons which have meant that running a business has become impossible. Generally, an asset sale is a swifter transaction than a share sale.

• Rising professional indemnity costs and shrinking capacity

With a share sale, one of the key concerns for buyers is that there could be a professional indemnity claim in the future. It is commonplace for a new buyer to require the seller to purchase run-off professional indemnity cover as protection. Typically, buyers ask for run-off cover of up to six years. However, there has been a marked rise in PI premiums and a reduction of insurer capacity and longer-term run-off cover may be difficult to obtain or prohibitively expensive. This lack of certainty can lead to difficulty in negotiating the relevant terms in the share sale agreement. With an asset sale, the seller retains control of the company over the run-off period and ultimately takes responsibility for its insurance arrangements – effectively leaving the seller as the master of their own destiny in this regard.

• Reduced professional fees

Asset sales are generally simpler and less time consuming to achieve when compared with a full-blown share sale. Share sale documents must deal with a myriad of issues such as balance sheet adjustments, tax indemnities and due diligence on the company’s share history to name but a few. All of these can, and often do, reveal issues that need to be resolved between the lawyers and the corporate finance specialists. An asset sale will generally not need to deal with these points which can lead to significantly reduced professional fees. Of course, there are things to deal with on an asset sale such as the novation of clients from one entity to another, and compliance with the TUPE regulations in terms of the transfer of employees.

• Smaller firms may be more suited to asset sales

Many regulated firms are in fact one- or two-man bands trading as limited companies. When such firms are sold, the sale proceeds are generally more modest, and the business should, in theory, be much simpler than a larger firm with multiple premises, advisers and support staff. However, these smaller firms can often be overwhelmed by share sale structures designed for much larger firms that result in huge amounts of management time being taken to realise a sale. Here, a much simpler asset sale could facilitate a far less painful exit – providing, of course, that the relevant tax advice is taken.

• Options after an asset sale

Asset sales may well have been more common in any event were it not for the difficulties posed by the resulting double taxation. Although the tax situation may be less attractive, a good prospect should still be able to command a high asking price without having to give potentially onerous (and often over-bearing) indemnities in favour of a cautious buyer. Even in this turbulent environment, M&A activity is demonstrating that wealth management businesses remain in high demand. There is no one-size-fits-all and, after a sale, some sellers may choose to retain a part of the business should they wish to continue doing some work. Others who want to exit will prefer to settle any debts and wind the firm up in accordance with FCA requirements. Suitably qualified advisers can provide guidance on this and liquidation, as necessary. Given the right conditions, an asset sale can certainly work for both parties. So long as sellers have a strong proposition, they should achieve an acceptable price, and both parties may benefit from what should be a simpler and swifter sale.

About Stephens Scown

Stephens Scown has over 300 staff, including more than 50 partners, across its offices in Exeter, Truro and St Austell. The firm has been ranked for four consecutive years in the Sunday Times 100 Best Companies to Work For.