The pros and cons of selling your SME to private equity

Advantages of selling to private equity

The financial advice profession is currently experiencing rapid consolidation, as private equity firms look to capitalise upon favourable demographics, regulatory trends, and rising costs in the sector. As many as 34 UK advice firms are currently backed by PE firms and are continuing to recruit advisers on a large scale.

The average age of a financial adviser is 58 and recent surveys suggest up to 50% of business owners have no exit plan. As such it’s easy to see why many advisers are tempted by selling to a PE firm. But what are the advantages of doing so?

1. Release capital and reduce your risk

As the owner of an advice business, you’ve built up value in your business throughout its life. That value may even represent a large part of your wealth. Selling part of your stake in the business to a PE investor can allow you to realise that value and free up capital to fulfil financial goals in your personal life while retaining a stake and role in the company.

2. Financial support

In addition to facilitating your exit, a PE investment can provide a capital injection in your business. That means you could finance growth projects such as expanding your operations, client acquisition, or invest in new technologies. A PE firm could also help you restructure your business finances, for example by paying off debts of finding better loan rates.

3. Skills and knowledge

A specialist PE firm typically holds industry knowledge and could advise you on anything from strategic planning to growth strategies and operational efficiency. They’re also likely to know how to help you improve corporate reporting or governance structures as you grow.

4. Operational efficiency

The big driver for consolidators is operational efficiency. PE houses typically have extensive networks and resources and may be able to connect you with new clients or suppliers to support growth.  Large firms can bring advice businesses onto the same platform and operating systems, which drive operational and cost efficiencies.

Disadvantages of selling to private equity

When you have fostered client relationships over several years, even decades, advisers have a duty of care when releasing capital value to ensure the same quality advice continues. Yet academic studies have revealed that acquisitions of financial advice businesses are leading to an increase in adviser misconduct after firms are taken over, both at an individual and firm level. Why is this the case and what do business owners need to consider when exploring a sale to a private equity backed firm?

1. Short term profit orientation

Private equity firms typically aim for short to medium-term returns on their investments. This can lead to a focus on quick financial gains rather than long-term client relationships and sustainable growth. Advisers might come under pressure to implement strategies that prioritise immediate profits, potentially at the expense of client outcomes.

Acquisitions also typically result in a destabilising effect within a business; subsequent leadership changes are frequent, and several PE backers are now looking to sell their firms (sometimes to other PE backers!) PE ownership cycles typically last five to seven years, but early sales are also common.

2. Change in company culture and values

PE firms are often focused on maximising profits and returns for their investors. This can lead to a shift in company culture and values of a financial advice firm. Client centric approaches may be compromised in favour of profit-driven strategies, potentially undermining the trust and relationships built with clients over time.

Some PE backed firms are acquiring as many businesses as possible without focusing on adequate integration, meaning they disrupt the culture without adding value. In reality, the PE firm is often hoping that the multiple of the firm being bought is lower than the multiple of a broader group sale at a later date. This profit-driven approach can also result in a lower valuation for a seller.

3. Reduced client focus

PE acquisitions can often result in cost-cutting measures to boost profitability. This means your clients may not continue to receive the same level of service they have been accustomed to pre-sale. Some clients may even be subject to additional charges because of the sale and moved into new products.

Resources may be allocated to client acquisition instead of client servicing with decreased personalisation and potentially reduced services. Can you guarantee your clients will continue to receive the same level of service in the future? Can you ensure there will be no disruption? With a drive towards operational efficiencies, clients are often subject to standardised processes and services. Centralised advice, delivered via a telephone centre, is also not uncommon at PE backed firms.

4. Loss of control

Because PE firms typically acquire a significant stake in a business, they will have significant influence. The new ownership may bring in new changes, management, and operational principles. Cost-cutting measures, changes in culture, and compensation structures often result in the loss of staff. Experienced advisers or staff who were previously integral to the success of the firm may choose to leave.

Andrew Shepperd, co-founder at Entrepreneurs Hub, recommends getting references from other owners: “Speak to three of four firms that have completed that journey,” he says. “Ask about their experiences and whether they think it’s a good idea for your company.” Find out how non-referred transactions worked out too.

5. Intensive due diligence

Any buyer will scrutinise your company in detail, but PE firms can be particularly intense. A spokesperson for the British Private Equity and Venture Capital Association (BVCA) says PE firms will expect detailed documentation, such as financial statements, projections, cash flow analysis and valuation reports. That’s in addition to company records, contracts and other legal documents.

Andrew says this data must be in good shape and able to withstand scrutiny. “Your management accounts need to tie into your statutory accounts, or you must be able to explain why not,” he says. “We often find they don’t. Some small businesses don’t even run monthly management accounts, but they should.”

You’ll need strong metrics and business intelligence, plus a clear strategic vision. Another stumbling block is the presence of defined benefit (DB) pension transfer advice liabilities in the firm being acquire; most PE backed firms will not want any DB exposure. Some IFAs choose to appoint solicitors to support with contracts and due diligence, however this can be very painful if they do not have any experience in our sector resulting in wasted time and money.

How we can help

Are you not quite ready to give up control of your business? Do you want to ensure your clients continue to receive the same level of service when you decide to exit? Are you interested in achieving a phased exit and ensuring a stable environment for clients and staff?

SJP Business Sale and Purchase

We have operated a market-leading Business Sale and Purchase scheme (BSP) for over 30 years with over 4,000 successful transactions since inception. Over £1.5bn of capital value has been created for selling advisers.

Continuity of service for your clients

It’s the clients who sit at the heart of our approach. We know relationships are fostered over many years and advisers have a duty to ensure this same level of high-quality advice continues. At SJP, clients enjoy continuity of funds with no movement of assets. Sellers can choose and approve the SJP Partner to whom they transfer the clients.

Eleanor Lewis, Advising Principal at Beckford and Lewis Financial Planning, explains how a BSP allowed her to fulfil her ambitions and develop her own base of clients.

“Ensuring a seamless transition and duty of care to my clients was of paramount importance and, in the year running up to completion, I was able to attend joint client meetings with the previous owner. This meant the clients felt confident they’d continue to receive the same levels of service. Without a business purchase, I would not be running my own business today.”

Comprehensive support

Throughout your exit, we provide support that includes legal, valuations, contracts, and HR consultancy. In fact, our support starts pre-sale, where we deliver consultancy on driving profitability, maximising value, and preparing for due diligence.

It's a model that gives new advisers a way into financial advice and established advisers a way out. We not only help buyers and sellers to find each other, but also facilitate the entire transaction, whether it’s a book of clients, part of a business, or a whole business. No private equity is involved. We loan money to buyers using our balance sheet, shareholder capital and innovative external lending solutions. This approach creates certainty for selling advisers.

Your future, secured

Our BSP is a proven model. We average over 30 sales a month and over 40% of our 4,700 advisers have used our BSP scheme to buy or sell a business. Plus our Advice Guarantee ensures sellers exit with peace of mind with no ongoing liability for past advice.

Sellers receive between five and eight times their ongoing advice fees, depending on several valuation factors such as client demographics, geography, and evidence of client servicing.

Stuart Shearer, adviser at Tailored Solutions Wealth Management, was searching for a robust exit strategy when he decided to align his business with SJP. “It has been brilliant to watch my business grow in value. I know with absolute certainty my clients are in good hands and my team supporting the business will keep their jobs. Over the next two years, we’ll meet the clients and transition the rest of the business across a process supported by SJP. I would have never had this opportunity as an IFA. I have fulfilled my career.”

Find out more about how we can help you to exit with certainty and confidence.