Selling up doesn’t always mean walking away

For many financial advisers, selling the business is imagined as a fairly clean transition. A price is agreed, due diligence is completed, the documents are signed and, eventually, the money arrives.

The reality is often rather different.

Increasingly, owners selling advice firms are not simply negotiating what their business is worth. They are negotiating what the next two or three years of their working lives will look like, how much control they will have over the eventual proceeds and what financial exposure they will retain long after completion.

That does not make these deals unattractive. There are sound commercial reasons for buyers to want continuity, particularly where much of the value sits in longstanding client relationships. But sellers need to look beyond the headline valuation. The structure surrounding the price can matter just as much as the number itself.

When £5m does not mean £5m on completion

Deferred consideration and earn-outs are now familiar features of advice-sector transactions. A buyer may agree a price based on recurring revenue, profitability or assets under advice, but only part of that consideration may be payable on completion. The balance might be paid over two or three years, sometimes subject to client retention or financial performance.

That bridges an obvious gap between buyer and seller. The buyer gets some protection against paying today for revenue that disappears tomorrow. The seller has an opportunity to receive the full value if the business performs as expected.

The difficulty is that, after completion, the seller no longer controls the business in the same way.

Suppose part of an earn-out depends on revenue or EBITDA over the following two years. Decisions about staffing, adviser remuneration, central costs, client charging or integration into the buyer’s wider group can all affect that result. A seller who previously controlled every significant decision may suddenly find that a substantial part of the purchase price depends on decisions made by somebody else.

This is why the drafting around an earn-out matters. Sellers should understand precisely what is being measured, what the buyer is permitted to change and what protections apply if the acquired business is reorganised or integrated.

The headline price may attract the attention. The circumstances in which you actually receive it deserve equal scrutiny.

What are you agreeing not to do?

The same applies to restrictive covenants.

A buyer acquiring an advice business is paying for more than a company name and a set of accounts. Much of the value may lie in client relationships, staff and goodwill built up by the seller over many years. It is therefore unsurprising that buyers seek restrictions preventing sellers from competing with the business or soliciting clients and employees after completion.

For somebody planning to retire altogether, those provisions may appear academic. For a seller who expects to remain professionally active, they can be anything but.

A restriction that prevents you from approaching former clients, working with particular employees or establishing a competing business for a defined period can significantly narrow your options. The detail matters: what activity is restricted, which clients are covered, what geographical area applies and how long does the restriction last?

These clauses should not be treated as boilerplate near the back of the sale agreement. They form part of the economics of the deal. A seller accepting a lower price because they expect to start another venture in a year’s time may take a very different view if the proposed covenants make that impossible.

Completion does not end liability

Then there is the exposure sellers retain for what happened before the sale.

Share purchase agreements typically contain warranties about the business. In an FCA-regulated firm, these can cover areas including regulatory compliance, client complaints, employees, contracts, accounts, tax and litigation.

Indemnities may also be required where due diligence identifies a specific risk. If there is a known regulatory issue or historic liability, for example, the buyer may require the seller to bear the financial consequences if that risk subsequently crystallises.

These provisions matter because a successful warranty or indemnity claim can reduce the value the seller ultimately retains from the transaction.

Sellers therefore need to pay close attention to limitations on liability: financial caps, time limits, thresholds for claims and the process the buyer must follow. Disclosure is equally important. Properly identifying issues during the transaction is not simply an exercise in satisfying the buyer’s lawyers. It can be an important part of protecting the seller after completion.

Selling the business without leaving it

Perhaps the biggest adjustment is personal rather than legal.

Advice businesses remain heavily relationship-driven. Buyers may therefore want the founder to stay for a transition period to reassure clients, retain key employees and help transfer relationships to the new ownership.

That can mean becoming an employee of a business you previously owned, working under a consultancy agreement or remaining involved against agreed transition milestones.

The change should not be underestimated.

An entrepreneur accustomed to making their own decisions may suddenly report to somebody else. Their remuneration, working hours and responsibilities may be documented separately from the sale agreement, while continued involvement may also interact with deferred consideration.

Before signing, sellers should be clear about what is expected of them. How many days will they work? What authority will they retain? Who will they report to? Can the buyer change their role? What happens to outstanding consideration if the relationship breaks down?

Those questions can feel secondary while everyone is negotiating valuation. Two years later, they may be the provisions that matter most.

Negotiate the exit, not only the price

None of this is an argument against selling. Consolidation can provide owners with an attractive exit, give clients access to greater resources and solve genuine succession problems.

But a sale should be assessed as a package.

A higher headline valuation accompanied by an uncertain earn-out, onerous restrictions and three years of mandatory involvement may be less attractive than a lower figure with greater certainty and a cleaner exit.

Owners understandably spend years thinking about what their business might eventually be worth. When the time comes to sell, they should devote the same attention to what happens afterwards.

Because completion may transfer ownership of the business in a day. It does not necessarily transfer the risk, responsibility or relationship with it.