In association with

1. In association with The following slides are taken from a series of workshops presented by Revie Consulting LLP on behalf of the New Model Business Academy

2. The Agenda • The current market – observation and comments • Its not all about the money • Its all in the detail • The legal bit’s and bob’s • How well do you know your business?

3. Background Comment • IFA Demography suggests 1/3rd of advisers could choose to retire in the next 10 years • Only 30% have clear exit strategy • Fewer than a half have identified the valuation required to meet their personal financial plans

4. Background Comment The Negatives • Macro economic conditions – 2008/9 downturn decrease in sales, asset values and resulting lower margins have seen sharp decline in valuations • Unable/unwilling to meet compliance pressures? - will a “fire-sale” start in 2012? • Lack of synergy and poor post-acquisition performance making buyers cautious

5. Background Comment The Positives • “RDR Practices” trading post January 2013 will be worth more • Consolidators - the hunt for scale • Distribution capture by product providers • Wealth management focus – International F S groups looking to expand into UK wealth management

6. Background Comment • Typical vendors are unlikely to have sold a business previously • Companies acquire with no clear vision, businesses are different, as are staff, clients and specialities. • Risks are prevalent for seller and buyer alike • “Sellers Market” at present, there are far more buyers than genuine sellers

7. Background Comment • Principals don’t have a clear idea of the type of company they are looking to buy, or sell to, this immensely decreases the chances of successful integration “A Revie tip” • Don’t be “flexible” about what you want, but be clear of where “your line in the sand “is • Be prepared to negotiate, be open minded and empathetic

8. It's not all about the money! Experience reveals that 75% of proposed businesses sales don’t complete! Why? The acquirer doesn’t have the acumen to buy and/or; the vendor doesn't have the acumen to sell!

9. It's not all about the money! • Vast majority are not full business sales with transfer of liability, but alternatively an ‘asset sale’ • Typically, passive income or other potential attached to the vendor’s client base • Much is said about the valuing of the asset and how the consideration is to be paid. Various ‘Earn out & Transition’ periods are discussed along with the newer ‘Licensing’ type arrangements all of which need careful study and equal reflection

10. It's not all about the money! • In our experience it’s not all about the money. Routinely issues arise in any or all of three areas, all needing to be treated with equal priority; obviously the consideration, however the ‘deal breakers’ are more often issues relating to staff, which may include the vendor if he is to stay on in some capacity, or concerns relating to the on-going care and servicing of the client.

11. It's not all about the money! • Our archetypal vendor is not the commission orientated money hungry individual that the FSA or media would purport them to be. A representative practice would have built its brand over many years, demonstrating care for staff and clients alike. • The vendor can find he is inexperienced, not having sold a business asset previously. Emotions can run high as negotiations; contract creation, exchange and completion of the sale all come to fruition Thinking and talking about a sale and it becoming a reality are two very different things.

12. It's not all about the money! If you are going to use a “middleman” they should be; • Far more than a ‘business estate agent’ the work of the facilitator should be greater than the creation of a data base, introduction, or the acting as a remote sounding board. • Meeting with vendors to help explore requirements and concerns should be taken for granted, along with meeting potential acquirers to understand their brand values and strategic aims.

13. It's not all about the money! • All this to establish the best ‘fit’ in each area. We believe the facilitator should also act as ‘joint council’ to achieve a ‘win-win’ situation for vendor and acquirer alike through to not only a successful sale, but to help create a continuing harmonious relationship, where vendor, staff and clients all remain as valuable assets.

14. It's all in the detail! The mergers and acquisition arena within the financial services sector is unique in certain aspects due to the nature of the advisers close relationship with his client, the historical way the adviser has been remunerated and the risks of purchase to the acquirer and vendor alike. We find the true merger of IFA practices is rare with a dominant party normally coming to the fore.

15. It's all in the detail! • Whole business purchases with advice and financial liability passing from seller to acquirer is seldom seen, and when is, the eventual consideration paid is greatly decreased • Risk of the unknown possibilities of client complaints requiring financial redress, fines and other costs payable to the FSA related to historical misdemeanours by the seller, repayment of commissions due to the termination of client investment contracts, to name but three of the potential liabilities the acquiring business could face and be liable for

16. It's all in the detail! • Practically, the sale could be viewed in the context of the seller winding up the practice and business assets being sold off, the assets of greatest interest to the acquirer being that of the passive income, the potential of new business and the opportunity to extract greater margins. • Passive income being typically, on-going recurring fund based or renewal commissions linked to past sales to the client base being purchased and/or regular fees paid under a facility agreement by the client for the service delivered by the selling IFA practice

17. It's all in the detail! There are a number of ways a practice can be valued a. Price per adviser – rarely used other than in high RI number practices b. Percentage of assets under advice/influence – difficult to demonstrate unless client assets consolidated e.g. on a platform c. Multiple of practice turnover – used universally in all sectors

18. It's all in the detail! d. Multiple of EBITDA – (earnings before interest, tax, depreciation and amortisation) also widely used across all sectors e. Multiple of recurring income – historically, and remains the most popular in the Financial Services sector

19. It's all in the detail! Other metrics often included • Proportion of initial commissions vs. passive income • Productivity per adviser (revenue generation) • Sales/Income per client (number of products & case size) • Level of cross-selling per client

20. It's all in the detail! • Historically, the valuation of the asset would be based on a multiple of the aforesaid passive income • A typical baseline would be in the order of 2.5 times that passive income, however if the selling firm was able to demonstrate, a sustainable scalable level of recurring income, a clear advice proposition with client agreements in place, particularly large case sizes, a loyal client base, highly productive qualified advisers, specific innovative Unique Sales Propositions (USP’s) along with the use of modern IT based back office support systems, the multiplier would increase to 3 times or even higher being used.

21. It's all in the detail! • If the selling firm indicated, that the owner(s) was seeking an immediate exit or retirement, have an over reliance on exiting key individuals, rely on a small group of clients, exhibit poor quality of client records, have poor compliance records or are not encompassing the FSA’s TCF or RDR initiatives, the multiplier would fall to below the 2.5 times to 1.5 times or less.

22. It's all in the detail! • Once, an agreed consideration figure is agreed between seller and acquirer it is highly unlikely that the full consideration would be payable, usually after negotiation somewhere between 30% to 50% of the sale price will be paid with balancing payments made after [say] a 1 year to 18 months with a final payment made after [say] 2 to 5 years.

23. It's all in the detail! • These balancing payments are habitually related to the performance of the business over the ‘earn-out’ period. In this type of agreement both advice and financial liabilities for the period up to the date of sale would remain with the seller for the rest of his life, however the seller could if he so wished, purchase an insurance policy (run-off cover) to potentially mitigate some of these liabilities.

24. It's all in the detail! • In recent times there has been a movement away from the purchase structure as described to an arrangement generally known as a ‘licensing deal’. • These types of agreement differ in that in effect a purchase never takes place or is at least deferred. The ‘potential purchaser’ takes control of the client base and the passive income it generates paying ‘the seller’ a portion of this passive income, and perhaps also a percentage of any new business income generated from the client base.

25. It's all in the detail! • An agreement to fully purchase may be entered into or the client base returned to the full control of ‘the seller’ at some predetermined future time. These ‘licensing deals’ offer an on-going income to ‘the seller’ whilst not losing ownership of the asset, they also offer the acquirer some protection as to the risks of purchase, the acquirer also getting a closer knowledge of the practice, its clients and performance over a period of time making the decision to purchase a more equitable and less hazardous proposal.

26. The legal bit’s and bob’s! “A Revie tip” Don’t ever be tempted to compromise on your legal team. This is probably a once in a lifetime transaction so hire the best corporate lawyers you can

27. The legal bit’s and bob’s! What do you know about; • Confidentiality agreements • Restrictive covenants • FSA notification and approval • Due diligence • Share purchase agreements • Letters of intent (LOI) & Heads of agreement (HOE) • Warranties & Indemnities • Disclosure • Insurance issues

28. The legal bit’s and bob’s! • Confidentiality agreements (CA) Before disclosing any information or documentation, the vendor and/or acquirer should consider whether a CA is required by them • Restrictive covenants They’re real and are regularly applied, make sure they are reasonable and acceptable • FSA notification and approval Required for acquisition or changes in control, acquirer must prove to be “fit & proper”. If retiring or ceasing to work in sector principal will need to formally de-authorise

29. The legal bit’s and bob’s! • Due diligence Recommended to be carried out by specialists, both in terms of compliance auditing and forensic accounting “A Revie tip” Be aware; Due diligence is always recommended but infrequently is it completed thoroughly enough!

30. The legal bit’s and bob’s! • Share purchase agreements (SPA) or an asset purchase agreement, if an asset purchase Principal contractual document, traditionally drafted by acquirers lawyer it can run to many, many pages Could include; Consideration and timing of payments, Warranties and indemnities, Limitation of liabilities, Restrictive covenants, Intellectual property, Employment, Pension provision, Other TUPE related issues, Property, Other conditions – e.g. approvals, timing of exchange & completion etc. etc. etc.

31. The legal bit’s and bob’s! Letters of intent (LOI) or Heads of agreement (HOE) A confidential document which outlines the purchase agreement between the parties.  Typically, not a legally binding commitment to buy or sell. However, certain provisions such as confidentiality agreements stand. These, along with payments to advisors and consultants, should be and usually are binding. Referred to as a “handshake in writing”, the main purpose is to assure that the parties agree on the general terms of the deal before starting due diligence and formally appointing legal advisers.

32. “A Revie tip” Without the terms written, the parties will expose themselves to critical ambiguities, omissions and potentially increase specifically the legal advisory costs.

33. The legal bit’s and bob’s! The LOI/HOE should identify and confirm agreement on all significant issues of the potential transaction and include the following; • A clear definition of what is being sold and what is not - list the categories of asset items. A good place to start is the current balance sheet and list exceptions or add-ons as appropriate. • Terms - Will the consideration be all cash at completion, stage payments, performance related or any other of a myriad of potential payment options. • Payment provisions - These define how and when the payments take place.

34. The legal bit’s and bob’s! Plus; • Work to be done by consultants and advisors, clarify in the document, before a definitive agreement is signed, who pays for consultants and advisors work. • Defining which party is responsible for drafting the definitive agreement (in our experience the acquirer’s legal advisors usually do this) • The LOI/HOE should have a target date for the completion of the definitive agreement and eventual completion.

35. The legal bit’s and bob’s! Warranties & Indemnities – what's the difference? Warranties • A warranty is a contractual statement given by the seller about a particular issue(s) or the condition of the vendor’s practice at a given point in time. • Typically, represents half the acquisition agreement and much negotiation time • “Buyer beware” (“Caveat emptor”) principle applies, no statutory or common law protection for the buyer

36. The legal bit’s and bob’s! Warranties, two main purposes • To provide buyer with a remedy if the statements made later prove to be incorrect and the value of the company is thereby reduced; a form of “retrospective price adjustment” • To encourage seller to disclose known problems to the buyer, because the sellers liability under warranties is limited to the extent that proper disclosure is made, the effect is to flush out potential problems

37. The legal bit’s and bob’s! Warranties - Two types General & Specific • General, sought by buyer (often rejected by seller) to give comfort that all information has been given to allow proper assessment and that there is nothing the seller is aware of that would dissuade buyer • Specific, cover every aspect of the practice, could include • Accounts • Regulatory/Compliance • Finance/Banking • Complaints • Contracts • Employees • etc.

38. The legal bit’s and bob’s! Warranties • It is normal practice for the seller to limit the liability under the warranties not only by cutting back on the wording of the warranties themselves but also by specifying certain financial and time constraints. • Normal period which buyer can bring warranty claim is six years

39. The legal bit’s and bob’s! Warranties • A breach will only give rise to a successful damages claim if the buyer is able to evidence that there was; firstly a breach, and secondly that the effect of the breach was to reduce the value and thus consideration paid. • The buyer will also have to circumnavigate any negotiated limitations which may make it difficult to bring about a successful warranty claim

40. The legal bit’s and bob’s! Indemnity • An indemnity is a promise to reimburse the buyer in respect of a particular type of liability, should it arise, on a pound for pound basis whether or not the value of the business acquired is reduced by the breach in question. • Therefore the purpose of an indemnity is to provide a guaranteed remedy where a breach of warranty may not give rise to a claim for damages, or to provide a specific remedy which might not otherwise be available in law

41. The legal bit’s and bob’s! Indemnity • Most appropriate for specific risks of concern to buyer General risks commonly covered; • Litigation or FSA Complaints • Data protection • Environmental • Doubtful book debts • Repayment of loans • Liability claims • Intellectual property rights

42. The legal bit’s and bob’s! Indemnity FS peculiar • FOS complaints made after completion but related to advice given prior to Not only to cover compensation but also other costs; PI excesses, legal etc. • Product specific indemnities – e.g. Arch Cru • FSA product investigations and redress • FSA rule breaches and potential redress • Data protection – client records (particularly pertinent to asset sale e.g. client base purchase)

43. The legal bit’s and bob’s! Disclosure • Key document in private acquisitions • If seller makes inadequate disclosures may find itself in breach of warranty claims that could have been avoided • If buyer fails to review properly may be in for some nasty surprises! • Disclosure is one of the key protections for the seller • No warranty claim if facts were disclosed

44. The legal bit’s and bob’s! Disclosure General & Specific • General - cover matters of public record or issues which the buyer should be aware, this via pre contract searches etc. that the buyer would normally make • Specific, cover matters which if not disclosed would constitute breaches of warranty and therefore the seller would wish to avoid and would be linked to warranties given

45. The legal bit’s and bob’s! Insurance issues • Most important will be PI for any claims prior to completion, seller needs to make sure transaction does not effect coverage by insurer, make sure you keep them in the loop • PI post sale – “Run off” FSA recommend for 6 year period post sale • Other commercial insurances – • Is cover going to end or be required post sale • Is it possible to assign? • Will any refund of premium be paid to buyer or seller • Who will receive benefit in the event of a claims already notified

46. How well do you know your business? • M.I. - What’s its value? • These are some example questions from our short 3 page questionnaire (you can also find it on our website) we use these answers to form “Vendor notes” that we then send on to selected potential acquirers • You’ll either know the accurate answers or you’ll know what you need to find out

47. How well do you know your business? History and Structure • Trading start date? • Ownership details? • Premises owned/leased • Is property included in sale? • Lease details? • Status ST/LLP/LTD – historical detail? • Authorisation type/Fees paid? • Staff numbers and roles?

48. How well do you know your business? Rationale for exit or exit strategy • RDR? • Retirement? • Management burden? • Other?

49. How well do you know your business? Turnover/Costs Trading year end (Month)? • YTD T/O-Costs-Margin? • Last T/O-Costs-Margin? • Prev.T/O-Costs-Margin? • % Passive income? • Other RI (if any) production?

50. How well do you know your business? FUM • Funds under management - £m? (where you receive any sort of passive income) • Funds under influence - £m? (Client monies invested via you where you receive no income)