Selling up: The importance of due diligence

Vicky Pearce and Roderic Rennison

Professional Adviser 28 June 2023

Vicky Pearce and Roderic Rennison look at the process of selling an advice practice and highlight the importance of due diligence despite it being potentially ‘intrusive, tedious and stressful’…

Have you considered your exit strategy? What will happen to your firm when you decide to retire?

Well-run businesses holding assets under management in excess of £100m are currently generating valuations of more than £1.5m.

This means cashing out could be a seriously lucrative way to realise the fruits of your labour.

However, selling a business can be a time-consuming and frustrating process that needs careful preparation and management. And with so much at stake, due diligence should be taken very seriously indeed.

To ensure you are prepared for any approaches that come your way, we’ve written this blog in collaboration with mergers and acquisition specialist, Roderic Rennison of the Catalyst Partners, to look at both the commerciality and compliance aspects of selling a business.

Is selling right for you?

Let’s not sugar coat this, more than 70% of business acquisitions fail and of those that complete, a large proportion of sellers are unhappy with the outcome.

There are several reasons for this, but a lack of planning and preparation are usually high up the list. As a seller, you may be thinking the onus is on the buyer to carry out due diligence, but you should also be actively researching prospective purchasers to ensure they are a good fit and are approaching you with the right intentions.

Failure to seek professional advice – or employ the right advisers – can make or break a sale. External consultants with appropriate legal, financial and regulatory expertise will not only ensure you achieve a fair deal, but also help expedite the process and keep it on track if issues arise.

Thorough preparation will always improve the outcome of a sale and it’s never too early to start. If you have partners or a management board, try to reach a common agreement on your future objectives and think about what you want to happen to clients, colleagues and yourselves should the business be sold. Once a decision has been reached, create a formal plan you can revisit and update at regular intervals.

There’s no harm in being prepared for an approach either. This includes having effective risk and compliance systems in place and a clear client proposition (work you should be doing anyway as part of your Consumer Duty preparations). Schedule regular reviews of your platforms, back-office systems and any other decision-making processes, so you are ready for a sale at the time of your choosing.

Valuing your business

A business sale typically takes nine to 12 months, but it may be longer depending on the complexity of the deal, the availability of funding and the efficiency of the professionals involved.


The process can be divided into the following main stages:

Assessment of buyers/offers

Heads of terms

Due diligence

Sale/purchase agreement


A few buyers at the smaller end of the IFA market have reduced valuations recently to reflect increasing interest rates, so be prepared for detailed financial analysis to carry on right up until completion. Valuations can be calculated in several different ways, but recurring income is widely understood and often used for smaller transactions.

Earnings before interest, taxes, depreciation and amortisation (EBITDA) is probably the most common method of valuing a business, particularly by private equity-backed acquirers and you should look for six to eight times EBITDA – up to ten times for larger firms. IFA valuations are occasionally based on assets under management, but this method is more commonly associated with DFMs.

There are a number of factors that can arise during due diligence that may prompt a purchaser to reduce their valuation, such as client demographics, particularly low average client assets and high average ages. Self-employed advisers within the business who own clients can also be a turn-off, as can low or inconsistent charging structures.

The importance of due diligence

Due diligence usually takes two or three months to complete after heads of terms have been agreed. Please remember no one is seeking perfection, nor is there any intent to catch you out, but there is a lot at stake for a potential purchaser and they are going to want to ensure you don’t have any skeletons hiding in the closet!

You might find external advisers are brought in to carry out due diligence. We would generally start the process with a review of your documents and records to establish that they are all available, consistent in content, current and complete. Significant gaps or dated information will make a potential purchaser feel uneasy – a bit like a missing service history on a high-mileage car.

Expect your board papers, adviser one-to-ones and KPIs to be scrutinised, along with the old favourite, file reviews, which are a great way to establish a firm’s quality of advice. These all bring your culture and approach to life.

You may also be asked to hand over any external assessments, audits or improvement plans that have been received, along with evidence that you actively embraced the advice and identified any weaknesses. We would also evaluate your registers, control frameworks and review meetings to ensure risk is alive and kicking within the firm.

There is no denying due diligence is intrusive, tedious, and stressful, so pace yourself but don’t be tardy in responding to requests for information. Treat it like an exam – answer the questions asked.

Don’t be tempted to guess or embellish your answers. You don’t want the purchaser to have enough concerns to reduce their price, or worse still, walk away altogether.

At the end of the process, the terms of the initial offer should be reconfirmed or renegotiated depending on what has been found.

Vicky Pearce director at B Compliant and Roderic Rennison partner at Catalyst Partners