What might an IFA M&A deal have looked like last year? There’s no one size fits all template, but there were certainly trends:
- In the past value was always historic, not forward looking – so it always made sense to finish a good year before coming to market.
- How much were businesses being offered and sold for? Looking at 2018 and 2019, recurring income prevailed as the approach, in 87% of offers received. And those RI multiples have been edging up, 3.3X in 2017, 3.4X in 2018 and 3.5X in 2019. When considering the volume of deals being done, a profit approach was much less prevalent in the market as a whole.
- Most deals will have a deferred payment, typically over 2 years. This could be longer or shorter through negotiation, but that may affect the overall price
- There will always be a clawback mechanism, often based on recurring income levels achieved annually – especially if the valuation has been approached with recurring income.
- Do note if the IFA is retiring, they will need to do a handover, which is considered part of the deal, not something they will be paid for separately.
When lockdown happened, many deals were significantly in progress. For Gunner & Co, all those close to completion at that point completed, with the exception of one – which wasn’t Covid-related.
We did see some changes to those deals completing – some accepted slightly lower upfront payments – to be made up from after 12 months; some clawback mechanisms changed – these changes have been followed through in the way new offers are being made too.
For example, where payments were typically completed at the 2-year mark we’re are now seeing more offers with longer payment timeframes, welcomed by sellers who have the opportunity to exit now and benefit from potential future market uplift. That has been coupled with more favourable clawback methodologies; for example, in the past market uplift wouldn’t be passed on as standard, rather more considered as a method of return on investment for the buyer.
Many buyers have also become more creative in how they value a business, potentially taking forward looking projections (which therefore include client growth as well as market growth), or even pre-lockdown income figures.
An interesting development has been a surge in profit-based offers, which have grown from 7% in 2018/19 to just under 20% in 2020.
This has been led principally by a shift in the buying market, where we are seeing more credible ‘investor’ led buyers looking to buy firms essentially as going concerns, rather than principally for consolidation, supporting retirement plans.
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