2 minute read
IFAs: Don’t sell your business, capitalise it and leave a legacy
ALEX COOK CEO, GCI
Independent financial advisers, wealth managers and brokers face one of their biggest challenges right at the end of their careers: how to turn their hard-won business into steady annuity income to ensure a financially stable retirement. The most common solution – selling the business and its client base – is the worst option.
That’s because these businesses, by their very nature, are typically one- or two-man bands, and so the price they would command is relatively low. The usual formula is a multiple of the annual turnover: 1.5 or twice is usual. This will not generate enough capital to come even close to replicating the existing income stream.
For example, an independent practice turning over R2m a year in fees could expect to fetch R3m to R4m in a sale. Presuming a prudent drawdown of 5%, the capital realised would generate in the region of R175 000 per annum (R14 500 per month) – a far cry from the income the previous owner had enjoyed. A reduction in income of this magnitude will inevitably have a drastic impact on the quality of anyone’s retirement, even if there is additional income from other investments. Another common – and equally unsuccessful – strategy is to ‘transfer’
clients to another independent operator of similar size in return for a percentage of the continuing income stream. The drawback here is that smaller independents seldom have the time to service a number of additional clients, nor the compliance, finance and admin infrastructure to cope with a far larger client base.
My experience is that the only reliable way to turn your independent business into a substantial annuity income stream is to undertake a carefully structured merger with a bigger independent firm. If this process is done correctly, the clients can be effectively transferred over an extended period. During this time, the owner can slowly introduce his or her clients to new advisers or wealth managers, and allow for new relationships to develop. It’s a somewhat delicate process, and we at GCI have actually created a dedicated merger department to handle it.
Our experience is that following a deliberate merger process delivers good results. The merged business actually grows because the team can dedicate its time to clients rather than running the business. This growth is good for all parties: clients receive better service and advice and, by becoming part of the GCI team, the advisors themselves earn more revenue.
A healthy advisory sector is a national imperative as we attempt to help more people achieve financial stability and, crucially, a secure retirement. Providing a way for independent advisers to reap the rewards of their hard work, and ensure continuity for their clients, makes good sense. Achieving these goals, however, means looking beyond the obvious.
