The process of buying an IFA usually takes one of two forms.
Typically IFAs can be bought by consolidators or by smaller firms, but how does the process work under both?
Transaction stages
Giles Dunning, financial services mergers and acquisitions specialist and partner at law firm, Stephens Scown LLP, says: “Most transactions begin with informal discussions between the main principals, this can be instigated by an unsolicited offer from a larger acquirer.”
“If the talks lead to anything, the next stage will often be to agree non-legally binding heads of terms which may or may not involve professional advisers.”
Mr Dunning explains: “Following conclusion of heads of terms, the parties will usually move to legal and financial due diligence anddraft a sale purchase agreement produced by the buyer’s solicitors.”
According to him, the processes behind being purchased by either can take a number of weeks or months to be finalised and only then can the deal be finally concluded.
Scott Gallacher, chartered financial planner at Rowley Turton says: “Purchases are typically made in staged payments, normally with 50 per cent upfront and the remaining 50 per cent paid in one or two instalments after a year or two.”
He adds: “This reduces risk for the purchaser, as if the clients don’t remain with them the remaining 50 per cent might not be payable.
"However, it significantly increases the risks for the selling IFA and to some extent requires them to remain ‘involved’ helping transition the client to the new firm.”
Mr Dyer adds: "Sale to a consolidator brings several challenges for smaller sellers - usually everything changes.
"The biggest issue is undoubtedly the cultural change: more flexible working practices are usually replaced with a more rigid approach and advisers will have to get used to more formal processes, including greater oversight and more paperwork.”
Due diligence
But according to Mr Dunning and experts there is a much higher scale of due diligence exercised by consolidators than small firms while purchasing an IFA.
“Most consolidators will have a standard offer which changes little from one acquisition to another. A trade sale, on the other hand, is more likely to be a one-off offer which is tailored to the needs of both parties.”
“Both processes will involve heads of terms, due diligence and a legally binding contract but there may be differences as to how consolidators will approach the process,” says Mr Dunning.
Stuart Dyer, chairman of Soprano Consulting says: “The due diligence process may be a little quicker and more informal [when being bought by trade acquirers] although this varies case by case."
Consolidators are likely to have specialist due diligence and integration teams who may spend much of their time working with the seller throughout the process explains Mr Dunning.
He adds: “Trade acquirers are less likely to have specialist teams and are more likely to rely on external professional advisers,” adds Mr Dunning.
