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Plan far ahead to successfully buy or sell a business

By Susan Yellin | August 26 2015 09:00AM

Advisors who want to either sell or buy another book of business or corporation need to plan a good three to five years ahead of time to ensure they have all their financials in order and decide if and where they fit in after the deal is done, a Toronto meeting of the Canadian Group Insurance Brokers (CGIB) has been told.

“This is a process you have to think through,” said Glenn Pittman, vice president, corporate development at People Corporation, a national provider of group benefits, group retirement and human resources services.

“If you are planning on buying a business or planning on selling, you need to prepare in advance – three to five years is optimal. You have to think about your future needs, desires and aspirations. Get your head around making a change – that’s the hardest part.”

Higher valuation

Setting that much time in place will also allow for a transition that will be much easier, much less risky and with a higher valuation than if selling quickly and with little planning.

It will also allow advisors to clean up and organize both their business and personal finances and settle any claims, he said.

Pittman said that time can also be well spent by assessing the fit between the advisor’s clients and a new potential buyer, going out with the potential buyer to smooth the transition and ensuring clients are happy – because happy clients can create a positive legacy and a reputation in the community after the sale as well as translate into more stable and recurring revenue.

A recent paper from the Canadian Federation of Independent Business (CFIB) suggests that only 10% of small and medium-sized enterprises (SMEs) have a formal plan to sell, transfer or wind down their businesses, while 38% say they have an informal, unwritten plan. More than half do not have any kind of succession plan.

Excuses for not having a plan range from those who say they haven’t really thought about it, to lifestyle and financial reasons of never wanting to retire.

But selling all or part of a business is becoming an increasing focus of many benefits insurance advisors, who have an average age of 58, Pittman said.

Not only is that cohort aging, it’s coming at a time when compliance regulations are mounting and some people are giving up licences because they find them to be an administrative headache, he said.

“You know about disclosure – it’s not getting any better – in fact it’s getting worse. That will require more time and energy and a big hassle. Well guess what? Disclosure, compliance – it’s increasing everywhere. This is going to continue. It won’t get better.”

On top of that, consolidation is continuing because scale is critical to maintain margins and operate effectively, he said.

However, there are other business reasons why advisors would want to sell all or part of their business. That includes selling only a portion of the business to provide the advisor with a longer-term financial strategy, he said.

Family succession planning can also bring up all sorts of issues dealing with ownership and partnership that need to be settled long before handing over the reins to the next generation, said Pittman.

As well, some advisors have built up their businesses with a certain number of clients and can’t do it anymore by themselves. “So how do you continue to grow the business at the rate you’ve grown in the past 10 or 15 years to get your return on investment or at least maintain the value of the business so you can get that back?”

Like every other major transaction, getting good professional help in the form of a tax specialist and a lawyer are required for a sale, said Pittman.

Buy-sell agreements also should be backed up by errors and omissions (E&O) insurance, said Roberta Tasson, senior vice president, corporate risk at the Magnes Group Inc.

E&O insurance has a number of advantages while an advisor is still working, but it can also be used as a “transfer of risk mechanism” to an insurance company when an advisor is pondering retirement.

Advisors can get E&O insurance based either on an “occurrence” or “claims-made” basis, explained Tasson.

Occurrence policies step in when a claim is made based on when a professional service was conducted and regardless of when the actual claim is made against the advisor. If the alleged incident takes place during the policy period, the occurrence policy will step in even if the claim is made after the policy period expires.

Claims-made policies are based on when the claim is made against the advisor – not when the service was rendered. But because claims-made policies do not cover claims after a policy has been terminated, advisors who sell their businesses need to have “tail” or “extended reporting period coverage” to act as a backstop, said Tasson.

Tail coverage

Tasson said she has noticed that many advisors who retire do not buy tail coverage to cover them after they stop working even though it’s not expensive. “We’re very astonished, but we get the comment that the advisor has been in the business for 30 years and never had a claim and they’ll take their chances.”

Having E&O insurance is a mandatory requirement of licensing, a mandatory requirement by insurers, agencies and/or dealers, as well as protecting a business and other assets.

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