When the time comes to sell

It's the nature of the beast - companies sell up to other, often bigger, firms for all sorts of reasons. Yet while it might be tempting to do so, you shouldn't necessarily bite the hand off the first suitor to make advances

If jurisdictions were vintage daytime TV shows, then the Channel Islands would have to be Supermarket Sweep. Plenty of companies have been rushing down the aisles to buy up smaller operators - from JTC Group acquiring Kleinwort Benson"s fund administration wing, to Equiom making a range of buys, including the Lloyds and Ardel trust companies. These are just a couple of examples from an action-packed financial services sector.

And the trend stretches further. Look at Guernsey-based aviation company ASG Group selling up to Bailiwick Investments; Jersey"s Arcade Creative being acquired by marketing and advertising agency Oi; and Guernsey media and design agency Coast selling up to Hamilton Brooke in July.

So what drives smaller companies to sell? In the land of tech start-ups, this kind of thing is ingrained in the DNA - companies will often launch, with one eye on selling out to a giant such as Facebook or Google in the not-too-distant future. It"s easier for them, as they have IP and patents that are easy to get a handle on.

In financial services, things tend to happen a lot more organically. These days, however, circumstances are changing.
Many smaller financial services firms are struggling to keep up with the costs of an ever-evolving compliance and regulatory landscape. Selling is, in some cases, the only way to avoid going out of business. The US"s Foreign Account Tax Compliance Act (FATCA) is one driver, anti-money laundering legislation is another. And there"s a raft of new stuff coming down the pipe as well - not least the EU"s Alternative Investment Fund Managers Directive (AIFMD) and transparency on beneficial ownership.

“This constant drip of new regulation adds overheads for all financial services businesses,” says Wayne Atkinson, Group Partner at offshore law firm Collas Crill in Guernsey. “So there are economies of scale to be exploited. If you have a team of 10 and one of them is a compliance officer, that"s a different cost base to having 20 people where one is the compliance officer.”

There"s another reason so many companies are up for sale. Because the Channel Islands" financial services sector is relatively mature, many owners are reaching the point in their career at which they need to retire. Selling represents a way out.

Mutual attraction

Generally speaking, larger companies don"t need their arm twisting to pull out the chequebook - they make a beeline for a smaller company for a range of reasons. It could be that it has a talented team or is in possession of a particular methodology. Snapping up the brand leader in a new field such as image rights structuring, meanwhile, may bring the buyer a level of prestige, as well as extra work.

Often the larger company will be after the smaller firm"s client book - companies will even buy a whole company because it has a strong relationship with a sought-after individual, according to Ewan Spraggon, Head of Assurance and Advisory Services at Baker Tilly in the Channel Islands, who works with companies looking to buy. He agrees that motives depend on the health and needs of the buyer.

“We"ve seen both extremes - companies buying businesses that aren"t performing that well, with the intention of bulking up their revenue stream, and those buying teams of such high quality that they know it will improve their own,” he says.

Any company that can show it boasts some or all of these features will be at a natural advantage when it comes to sitting around the negotiation table. If it can prove it has a team that"s not only very skilled but loyal too, one that won"t be able to walk out on a month"s notice and will react well to being managed by someone new, the buyer will be assured they"ve made a good acquisition a month or a year after the deal.

The same goes for the client book - if the company can show the client book won"t slam shut once the current owner leaves, and that income down the line is guaranteed, they"ll be in a position to drive a harder bargain. 

So with all this juicy deal money flying around, and the overwhelming burden of compliance increasing, more companies will be tempted to sell. It"s a case of putting yourself out there in the financial services community, delivering high-quality business and waiting for the right partner to come along.

The good news is they probably will. “We"ve had plenty of clients coming to us asking: "Do you know of anyone looking to sell?",” says Atkinson.

Get yourself noticed

There are ways to stand out here. First up, build a good reputation. Incentivise your staff to ensure they"re on board with the change, and ensure that your house is in order - that all property leases and communications with the regulator are up to date. But much of your bargaining power will come down to what your company offers - knowhow is attractive, as is market positioning.

Finally, it"s crucial that relationships, both within the business and its wider network, are balanced correctly. “If the success of the business revolves around the owner, then the other company isn"t buying the business, they"re buying that owner,” says Spraggon.

“So try to manage how the business is run. Ensuring that it"s not reliant on an individual can increase the value of the proposition.”

Get these elements in place and people will come knocking. But while it may seem straightforward, it is of course perfectly possible to get the process wrong. Just like dating. In fact, the two are strikingly similar - at least when it comes to desperation. “If you"re obviously looking for an exit, people may well be less keen, oddly enough,” says Atkinson.

There are plenty of other factors that can disrupt a potential sale. A suitor will expect to conduct thorough due diligence - and this will unearth any processes that are being run in a haphazard fashion. Habits that seem perfectly functional to the business in question may be unfathomable to an outsider. And any difficulties at this stage could scupper the deal.

Finances and reporting are, in fact, a potential minefield. Most companies will be buying a business for its future revenue stream. The big risk is that this doesn"t materialise as intended because clients aren"t happy with the product or aren"t getting the service they should be. Keeping a paper trail that shows this is all in order gives the buyer comfort that the business is being run correctly. Companies are sometimes bought for a lower multiple than others because this hasn"t been handled right.

The current trend may be for a high volume of deals, but it"s not necessarily a flash in the pan. In fact, given the ongoing pressures of compliance costs and the maturity of the financial services industry in the Channel Islands (which means many owners are now naturally looking to reduce their commitments), there"s no reason to suggest that the volume will drop in the short to medium term.

And while these issues tend to be cyclical - you"d always expect independents to spin out of the larger entities that form from these acquisitions  - things may well be different this time. Spraggon says: “It"s harder to set up independent companies now because of the burden of compliance regulation, both in the money it costs and the time it takes up.”