Selling an IFA Business (Step-by-Step Guide)

Wondering, “How do I sell my IFA business?”

Selling an Independent Financial Advisor (IFA) company is a massive deal for many business owners worldwide. The whole process can seem overwhelming at first.

However, you can still ensure a seamless and profitable deal that maximizes your value and benefits your clients.

How, you may ask?

This guide will take you through the essential stages of selling your IFA firm. Continue reading for clear and specific instructions on how to help you manage each phase successfully.

TL;DR - How Do I Sell My IFA Business?

Here’s a quick gist of the process of selling an IFA business:

• Define your objectives: Decide the type of sale you want and the price you will accept.

• Prepare your business: Maintain good financial health, a client base, and regulatory compliance.

• Form your team: Hire an M&A consultant, a lawyer, and a tax expert.

• Market and select buyers: Create a sales package with your advisor and locate the ideal buyer.

• Due diligence and negotiations: Buyers will review your company and settle for a final price.

• Closing the deal: Sign contracts and transfer ownership.

Need help with selling your IFA business? Exitwise can make the whole process stress-free and simplified. We have a well-strategized process to help you hire the best M&A experts with extensive industry-specific knowledge.

Reasons for Selling an IFA Business

The reasons behind IFA business exits differ from one owner to another and usually involve a combination of the following factors:

1. Personal, Retirement, and Lifestyle Changes

The aspects below typically indicate changing priorities and life stages that can bring on your decision to step away from your business:

• Personal circumstances: Changes in personal situations, such as family obligations or health issues, can make you sell your business. 

• The desire to retire: You might want to retire and enjoy a less stressful lifestyle after years of hard work building the business. 

• Trying new opportunities: You might be planning to explore new career endeavors or opportunities that align with your changing personal and business goals. 

• Succession planning: Upon your retirement, you may not have a clear successor in place. A sale can ensure service continuity for your clients while allowing the advisors to exit on their own terms. 

2. Business Operations and Growth

You might want to sell your business because of the following reasons related to how it operates and its growth:

• Easing end-of-the-year pressures: If you find managing year-end pressures like tax filing increasingly stressful, you might want to sell. This is especially true for smaller firms with small teams that can't afford to shift their focus from financial advice to sorting out administration issues most of the time. 

• Managing regulatory pressures: Dealing with an increasing regulatory burden can be difficult, especially for smaller firms. Selling can be an easier option. 

• Keeping up with client demands: If you lack the financial and human resources to meet the increasing needs of clients for better services or a digital experience, selling can transform the customer experience. 

• Promoting business continuity: Selling to a larger IFA firm can ensure that the business will continue serving its clients and leave a positive legacy. 

• Improving efficiency: Selling to a larger firm can bring in the required resources and economies of scale, improving operational efficiency and reducing costs. 

• Changing approach to client-facing activities: You might sell and remain in the business if you wish to focus more on advising clients without the risks associated with running a business. 

3. Financial Factors

Some factors related to finances that might make you want to sell your IFA business can include:

• Achieving financial security: You might want to sell your business for a substantial payout and/or an ongoing income stream if you structure it as an earn-out. 

• Dealing with rising costs and operational burdens: You can sell to get relief from increasing compliance costs, operational expenses, or tedious reporting obligations. 

• Leveraging opportunities for a good sale price: You can sell to secure a favorable sale price, such as when the market is buzzing with IFA M&A activity. 

Signs It’s Time to Sell Your IFA Practice

Several signs might indicate it's time to sell your business, including:

• Market changes and competitive landscape: New competitors and shifting market conditions can affect the value of your business and its long-term viability. Your business model might also be phasing out, making selling to a bigger firm with a better market reach a strategic move. For example, you might be losing clients to firms with robust technology capabilities, such as those using robo-advisors. 

• Difficulty attracting new clients: If you are struggling to acquire new clients or experiencing a consistent decline in client retention, it may be time for a change.

• Receiving an attractive acquisition offer: If you receive a tempting unsolicited acquisition offer, it can be a sign to sell your practice, even if it's performing well. You can secure a favorable exit this way.

• Decline in passion and motivation: Financial advising is highly demanding and requires motivation and passion. You might want to sell if you lack the drive to continue or feel burned out. 

• Declining business performance: Consistent poor performance, including year-over-year losses, is a huge red flag. If you are struggling to generate revenue or profits, or if your business isn't adapting well to internal and external changes, it may be time to consider selling to avoid further losses. 

IFA Business Valuation Overview

Knowing the worth of your Independent Financial Advisor (IFA) business is an important first step in the sales process. Remember, a fair and accurate assessment attracts serious purchasers and allows for an effective sale.

There are two common ways to value IFA businesses:

1. Recurring Income Multiples Method

In the recurring income multiples strategy, you increase your annual recurring income (RI) by a predetermined factor.

Recurring income usually includes ongoing fees from client assets under management (AUM), i.e., the total market value of all your financial investments. Stocks, bonds, and other securities your IFA business owns fall under this category.

The specific multiple depends on profitability, growth prospects, and client base quality.

2. Profit Multiples Method

This method multiplies your company's Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).

EBITDA is the company's primary operational profit. Like recurring income multiples, the specific multiple applied depends on profitability, growth, and risk profile.

Regulatory Requirements for Selling an IFA Business

The complex sale process for an IFA practice involves meeting various regulatory requirements. 

The major considerations include:

• Notification of change of ownership: If an entity or a person acquires or increases control in your IFA business, you must notify the SEC or state regulators within 30 days, depending on the body that oversees your practice. 

• Client notification and consent: You must notify your clients of the pending change in ownership. If you need to transfer client contracts or change the client's advisor, you may require consent from the client. A new client agreement may be required, unless you structure the deal as a share sale or merger with proper continuity language. 

• Data security compliance: If you transfer client data, you must adhere to established data protection measures. 

• State-level-only regulator review: Some system regulators may require pre-approval of ownership changes or ask to review documents before you close the sale. 

• Due diligence and compliance records: You must make your books and records available for inspection and review. The buyer will also review your compliance manuals, disciplinary history, and past audits.

How Do I Sell My IFA Business? Step-By-Step Process

The actual sale of your IFA business needs to be well thought out and implemented appropriately. This step-by-step process will walk you through the essential stages:

Step 1: Clearly Define Your Goals and Objectives

Before diving into the sale, step back to solidify your goals.

Here’s how to do it:

• First, decide what kind of exit you prefer: a complete sale, a partial sale with ongoing involvement, or a merger.

• Next, research and develop a realistic expectation for your business's value in today's market.

• Finally, set a timeframe for the entire process, considering market conditions and potential buyer timelines.

Step 2: Prepare Your IFA Business for Sale

For a hassle-free sale process, ensure your IFA firm is in excellent condition.

Here’s how you can achieve that:

• Maintain accurate financial records to ensure a seamless due diligence process for potential buyers.

• Analyze all aspects of your clientele, including growth potential, profitability, and demographics.

• Finally, do a full compliance check to ensure your company meets all relevant Securities & Exchange Commission (SEC) requirements.

Step 3: Consult with Professional Advisors

A successful IFA business sale requires the involvement of qualified consultants.

Here are some key advisors to consult:

• An experienced Mergers & Acquisitions professional in the IFA sector to negotiate with possible purchasers, organize the deal, and market your company.

• Legal counsel to ensure the acquisition runs smoothly by evaluating and finalizing legal documents and safeguarding your interests during the negotiation process.

• A tax professional to understand the potential tax implications of the sale.

Step 4: Planned Marketing and Buyer Selection

The marketing and buyer selection phase involves a few key stages.

a. Signing the NDA: First, sign a Non-Disclosure Agreement (NDA) with possible buyers to protect the confidentiality of your sensitive business information. Here’s why:

• This document safeguards your financial information.

• It also safeguards client information and internal sales processes. 

b. Creating a marketing package: Next, create a thorough marketing package highlighting your IFA company's USPs and key strengths. This package, also known as a Confidential Information Memorandum (CIM), should be clear and straightforward and outline its strongest features for prospective acquirers.

c. Evaluating buyer credibility: The last step is a thorough buyer qualification check. This includes evaluating:

• Potential purchasers' financial health

• Strategic fit with your business objectives

• Cultural alignment with your current team and client base

Step 5: Handling Due Diligence and Managing Negotiations

The next step in selling your IFA business is to assist with the due diligence process and close the deal.

Your prospective buyers will research your company, so be prepared.

Here’s a tip: carefully review your financial accounts to ensure they’re accurate and compliant with legal requirements.

Buyers will also review client agreements and other legal paperwork.

In parallel, you should:

• Collaborate with your M&A advisor to create a negotiation strategy that secures the best possible terms for your sale.

• Consider the initial offer, potential earn-out structures, and other deal points to optimize your returns.

Step 6: Closing the Deal and Ownership Transfer

A formal Sale Agreement will wrap up the deal after successful negotiations.

Here’s what this legally binding document covers:

• Details the agreed-upon purchase price, closing date, and any post-sale transition plans 

• Critical information like payment periods and potential earn-out procedures 

To ensure a seamless handover, you must collaborate with the buyer to transfer the necessary business documents, operational procedures, and customer relationships. 

When you partner with Exitwise, we simplify the exit process by connecting you to qualified professionals who understand the IFA market. Get in touch with us today to see how our experts can help you sell your business successfully.

5 Risks to Mitigate While Putting Your Business Up for Sale

Selling your Independent Financial Advisor (IFA) business is a big financial step.

While your profits can be huge, the process is not without hazards. But if you're aware of the risks and address them adequately, completing the deal and safeguarding your best interests becomes easier.

Let’s take a look:

Risk 1: Confidentiality Breaches

It is important to provide sensitive financial information to potential buyers during due diligence. However, the data can get leaked, jeopardizing your competitive advantage and undermining ongoing client relationships.

How Can You Mitigate this Risk?

Before sharing your secret business information with anyone, you must ensure all potential buyers sign a Non-Disclosure Agreement.

Risk 2: Legal Disputes

Unexpected legal problems can arise throughout the sale process, including:

• Non-compliance with non-compete agreements by workers

• Disputes with previous client/vendor

• Intellectual Property (if any) ownership conflicts, etc.

These can seem like ordinary obstacles at first. However, ignoring them could trigger costly detours and disagreements between both parties - or even cause the sale to fall through entirely.

How Can You Reduce this Risk?

Consult a reputable M&A attorney with IFA sales experience to analyze the legal papers and advise you through the sale process.

Risk 3: Loss of Important Staff

The news of a potential sale can cause turmoil in your workforce. Key staff may quit for new opportunities, affecting client service and business continuity.

How Can You Reduce this Risk?

Create a communication strategy to keep your team informed throughout the process. Stress the advantages of sticking with the business even after it has changed hands.

Risk 4: Post-sale Obligations

Many people are unaware of this scenario, but you're legally accountable for some of the new owner's actions, depending on how the sale is structured.

Although ownership and most ongoing responsibilities are transferred during the sale, you may still have unfinished business, depending on the sales structure.

For instance:

• When your company’s assets are sold to the buyer in an asset sale, the legal entity still belongs to you. Therefore, any liabilities, such as pending lawsuits or tax obligations, will generally remain with you unless specified in the deal terms.

• In a stock/equity sale, the legal entity, associated assets, and all liabilities are generally transferred to the new owner. However, you may be held accountable for some time if it's revealed that any false statements about the company's financial status were made during the sales process.

How Can You Reduce this Risk?

The purchase agreement is vital to minimizing your liabilities when you sell your IFA business.

During negotiation, make clear, unambiguous representations and warranties about your business. These warranties and representations ensure the customer can't return later and make claims about unknown issues.

Risk 5: Undervaluation

An incorrect valuation of your IFA firm may result in a lower sale price than your company deserves. Various factors can result in undervaluation, including:

• Rushing the sales process without adequate planning.

• Not doing in-depth research on how to maximize your business value.

• Not hiring qualified M&A specialists to handle deal structuring and appraisal, etc.

How Can You Reduce this Risk?

There are two ways to go about it. First, you can consult a certified business appraiser with experience in the financial services sector to calculate your company's fair market worth.

You can also find out your IFA firm’s worth by using our business valuation calculator.

4 Tips and Strategies for Selling Your IFA Business Successfully

Looking for tried-and-tested strategies on how to sell your company? Your search ends here.

Adopt the following tips to optimize your exit's value and ensure a seamless transfer of ownership:

1. Put Yourself in the Buyer's Shoes

Goal: Understanding what attracts potential buyers to your IFA business

Plan of action:

• Identify your company's strengths, including clientele, regular revenue streams, and workforce with specialized knowledge.

• Assess how your company stands out from the competition by analyzing the market.

• Access your company’s operational efficiency and scalability - can it grow without proportional investment from the buyer? Are there multiple cross-selling opportunities to increase revenue?

Why follow these steps?

Understanding buyers' motivations allows you to adapt to the selling process. By highlighting your company's best features, you can attract more customers and increase the asking price.

2. Utilize Data to Showcase Your Business's Potential

Goal: Providing evidence of your IFA business's success

Plan of action:

• Collect past financial stats that show steady profitability and client growth.

• Segment your customer base by assets under management (AUM) and recurring revenue streams.

• Monitor key performance indicators (KPIs), such as client retention rates and average client AUM, to demonstrate your operations' efficiency and effectiveness.

Why follow these steps?

Data-driven insights provide a comprehensive view of your company's health and growth trajectory. When you present verifiable evidence, prospective buyers are more inclined to believe in the offer valuation.

3. Benchmark Salaries for Team Valuation

Goal: Calculating how your human capital adds to business value through salary benchmarks

Plan of action: 

• Look into industry salaries and compensation packages for skilled financial advisors and support workers.

• Utilize reliable sources like salary surveys from respectable hiring companies or professional groups.

• Benchmark salaries for each position, keeping experience and qualifications as critical factors (e.g., years of experience, relevant certifications, specialized knowledge, etc.)

Why follow these steps?

A fair and data-driven approach to team valuation ensures a realistic asking price and prevents conflicts during discussions with purchasers.

4. Rationalize Your Services and Charges

Goal: Improve buyer appeal by showing a streamlined and profitable business model

Plan of action:

• Review your existing fee structure to ensure your services are reasonably priced based on your experience level.

• Explain the benefits clients get for the money they pay in clear terms.

• Highlight recurring revenue, as buyers place a high value on these streams — for example, a steady revenue from recurring service fees and long-term client connections.

Why follow these steps?

A clearly stated and supported price schedule shows that your company is professionally run and customer-focused. This can increase buyer confidence in your IFA's long-term viability.

Using these methods, you may substantially boost your chances of selling your IFA firm for a higher price while guaranteeing a smooth transition for your clients and employees.

So, are you ready to go deeper into your exit options? Schedule a call with Exitwise today, and let us interview, hire, & manage your team of M&A specialists to plan the dream exit for your IFA business.

Frequently Asked Questions (FAQs)

Before we wrap up this blog, let’s look at some FAQs about how to sell your IFA business like a professional:

What Documents Are Needed to Sell My IFA Business?

Depending on your company's structure and buyer requirements, you may need multiple documents to sell your IFA company. However, some general documents you'll likely require are:

• Financial statements for the last three years (audited if necessary)

• Tax returns from the last three years

• Anonymized client data

• Permits and licenses for your business

• Contracts with customers and suppliers

• Contracts of employment

• Leases and property documents (as appropriate)

• Documentation for professional indemnity insurance

Finding out exactly what paperwork to bring in your specific case can be tricky. We recommend that you speak with your accountant and legal counsel first.

How Can I Find Potential Buyers for My IFA Business?

There are various approaches to discovering qualified buyers to sell your IFA business:

• Specialized M&A brokers have a vast network and knowledge to find prospective buyers.

• Investment banks also have specific teams that can connect you with possible purchasers.

• Professional societies for financial advisors can also facilitate introductions to wealthy prospects. Lastly, you can directly pitch established wealth management organizations or larger IFAs to see their interest in acquisition.

What Are the Key Factors That Influence the Sale Price?

The most important factors that affect the IFA company's sale price are:

• Strong financial performance (sustained profitability and sales growth)

• Value of client assets under management (AUM)

• A solid, consistent clientele with good retention rates

• A spotless compliance record and a good market situation

How Long Does the Process of Selling an IFA Business Typically Take?

Selling your business can take anywhere from 6 to 12 months. It depends on the deal's complexity, market conditions, and prospects. Here's how it works:

• Planning (1-3 months): Document collection, business valuation, and advertisements.

• Client search & negotiation (2-6 months): Finding qualified buyers, completing due diligence, and settling the purchase terms.

• Closing the sale (1-3 months): Completing paperwork, getting necessary approvals, and transferring ownership.

This is a general breakdown and might differ from company to company.

What Are the Tax Implications of Selling My IFA Business?

While selling your IFA business, you'll have to pay Capital Gains Tax (CGT) on the profits earned. You can calculate the profits by subtracting your initial investment from the sales price.

Your rate of Capital Gains Tax (CGT) will vary depending on many factors, including:

• Whether you sell the company as assets or shares (stock sale)

• If you are eligible for Business Asset Disposal Relief (BADR)

BADR, formerly Entrepreneurs Relief, can drastically cut your CGT rate (up to 10% under certain conditions).

Disclaimer: We strongly advise consulting with a certified tax advisor to fully understand the tax implications of selling your business.

How Can I Ensure Confidentiality During the Sale Process?

Take these essential steps to protect confidentiality during the sale of your IFA company:

• Request prospects to sign Non-Disclosure Agreements (NDAs) before receiving sensitive data.

• Restrict access to confidential information to only those directly involved in the sale.

Finally, be cautious when discussing the sale with people outside your circle.

Conclusion

Selling your IFA business can be a complex and time-consuming process. Planning and minimizing your risks can ensure a smooth transition for your clients, employees, and yourself.

At Exitwise, our network of qualified advisors can give experienced advice throughout the sales process, from initial valuation to sealing the acquisition.

Ready to explore your options? Connect over a call with us, and we’ll walk you through the entire process of how we can help you exit the market profitably.