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Buy in, sell out or do nothing? What to consider
Written by: originally published in IFA magazineAmong all the changes reshaping the financial services sector, one of the most interesting dynamics is the level of merger and acquisition activity currently taking place. The punishing effects of the global financial crisis is forcing many planners to ask hard questions, not only about how to best survive the downturn, but also about the kind of environment in which we will all be operating in the future. Contemplating how the new world order aligns with your own business goals may make you wonder if the time has come to take that next bold step. What are the main points to consider in planning your next move?
Do nothing
Maintaining the status quo may be the preferred option if you are very confident about the future of your business, especially if you can see lots of opportunities for expansion. If you are well placed to deliver this expansion, you are better off developing “blue sky” into real, income-generating activity and selling a more valuable asset at a later date.
One of the risks of the ‘Do nothing’ option is that you’ll probably be more of a generalist than you would like. Many planners begin with a passion for, say, client service, but an inevitable requirement of growth is to spend time on IT systems, administration and the like. It may very well be that you now spend little time on the activities that initially drew you to the industry. Buying into a company which already has the systems you need could be a way to return your focus to the work you like doing.
Doing nothing is problematic when the only reason for not buying in or selling out is because nobody will pay your price. Vendors almost always set a higher value on their businesses than buyers, but when this difference becomes entrenched as greed it’s self-defeating, because vendors can’t vend and buyers can’t buy.
Buy in
You buy in when you don’t want to leave the business and still want to exercise some control, but you recognise that you need considerable investment to put the right systems in place. This investment threatens your current lifestyle and future profitability. A buy in may also be motivated by the wish to realise your investment in the company, usually as part cash and part shares in the company you’re buying into.
There’s more risk to buying in versus selling out because the value you get for your company will depend, in part, on the performance of the company you’re buying into. You will also be exposed to the management of the new company who may see things differently from you. But because risk and reward are directly related, a successful buy in will result in you gaining potentially much greater value from the transaction than a simple sell-out. Typically, deals are structured in terms of staged payouts, and if the company you’re buying into offers complementary strengths, this could significantly increase the value of future payouts.
Sell out
The usual motivation for a sell-out is diversification: if most of your capital is locked up in your business, you may want to release it, especially if you want to retire. After all, isn’t concentration risk is something that you’d consider when advising your clients! You may also recognise that your business needs large scale investment, but don’t wish to remain part of the business going forward.
Questions to ask
What lifestyle do you want?
Doing nothing means that business will remain all-consuming as you manage growth. By buying in you can take some cash now and probably relax somewhat. If you sell out you can sail away.
How much money do you and your business need?
If you do nothing you’ll probably need to reinvest most profit to grow. Selling out means it’s pay day. Buying in will pay you something up front, but also leave you with significant equity in a larger business.
What is your risk appetite?
Doing nothing is high risk because if the business fails you lose everything. Selling out is the lowest risk, but probably the lowest return. Buying in is a medium-risk option – some money now, but the final reward will be determined by performance at a later date.
Self-directed or delegator?
If you are self-directed you’ll want to stay in control by doing nothing or selling out. If you like delegating, buying in may work well because you’ll feel more comfortable handing over some control. An honest assessment of your own temperament is critical.
At any one time I’m in discussions with a number of companies exploring partnerships or acquisitions. Invariably the outcome is determined by the coherence with which business owners have thought through these issues. The most solid foundation for a successful outcome is when business owners have considered what they want from a deal, not only financially, but also in terms of the implications for risk appetite, level of control and lifestyle.