Sheriar Bradbury (pictured), Steve Moseley and Mark Woods explain the best way to fund buying up other client books.
Managing director, Bradbury Hamilton
I don’t get the company to borrow money, that way there’s no debt.
I feel the banks are too unreliable. I would not run an overdraft they could withdraw at any time. I have seen that happen to some.
There are also problems for any upfront deal. If you start doling money out upfront then what guarantee do you have from the other end? You would not be able to enforce their end of the agreement and you lose leverage.
Don't pay upfront
My advice would be to save up cash over time, and if you don’t have cash then don’t pay upfront. We never pay more than 50% initially for an acquisition. It would be too much of a strain on cashflow.
What you can do is use an asset. Indeed, you could set it against your house. That way you are only risking the money you have provided. If you borrow against the business the bank’s claim is not restricted to the money put up. The bank will probably ask directors for a personal guarantee in which case you might as well get a cheaper loan restricted to your own property.
Just make sure you clear it with any dependents living there.
If you are not putting up the cash then the lenders are taking a bit of a risk on you, because you are not putting up your own money.
Director, Sterling McCall
We agree to pay a firm back over a period of two to four years at up to two times the value of the clients. We pay them a multiple of the trail commission that we get from the clients, and for a client with no trail we convert a percentage of new business or client assets into a trail payment.
The risk is reduced for my business because we are not spending capital.
The reason I do this, and haven’t borrowed so far, is cashflow, which is impacted by having to repay that debt.
Some firms think it looks like we are paying for clients using the selling firm’s own money. However, I am putting my own business at risk. Indeed there are businesses that are paying too much upfront for client banks.
In my experience lenders do not like IFA businesses. They think that all we are purchasing is good will, meaning they don’t understand trail. They think that business will just walk out the door.
While they will be happy to lend on the basis of an order book, they will be less likely to lend on an income stream.
The alternative to bank lenders would be venture capital investors. However, the two things that put both banks and venture capitalists off most are the retail distribution review (RDR), because of uncertainty, and the issue of ownership of trail commission.
We have a good model, but we have not found many people willing to lend because of RDR.
Director, Watermark Financial Solutions
The average IFA who is planning to acquire client banks does not have the cash to pay a one-off payment and nor should they. The risks are too high.
Some sellers are unrealistic with their expectations and demands, so it is down to the acquirer to conduct due diligence on the seller so that he understands exactly what lurks within the proposal.
The better the client base and the more easily you can take it over, the more valuable it is and the more you can pay for it.
Added value can come from a hand-over period where the seller works with the acquirer to embed clients into the new firm.
Essentially, when acquiring client banks, we have paid up to six times trail income, but this was for a small high-net-worth client base with a solid hand-over from the seller.
This money was paid away at a rate of 60% of the trail income we took on over 10 years, or until the amount we paid had reached six times the trail we took on at day one, whichever event came first. Because we worked this client base well and gained increasing trail income, we were able to pay off the IFA in five years.
If the deal is not self- financing we will not touch it.
By buying out a client base as a percentage of renewals over a period of years, you create positive cash flow and by not paying all of the renewal away to the seller for a shorter period, cash is available to properly service the clients taken on.