Like much of the economy, the mergers and acquisition market for IFAs has been infected by the coronavirus pandemic but there are still opportunities.
The ingredients for M&A in the financial advisory sector haven’t disappeared though.
There are still incentives for smaller firms to sell as the factors that were present pre-crisis – such as rising professional indemnity premiums and regulatory pressures – remain, and acquirers have long term acquisition programmes to fulfil.
Markets have remained remarkably resilient and have rallied significantly since the initial declines seen in late February. However, speculation remains that we may see further market adjustments later in the year and this is likely to mean that acquirers will remain cautious. This may create pent-up demand on both the side of the buyer and the seller, and this will eventually need to be unlocked. I am still hearing of potential deals and a willingness to transact, but the type of offer may be different to suit market conditions.
The biggest issue is valuation because the price of an IFA business is often based on a multiple of recurring revenue or earnings.
Many investment portfolios will be affected by uncertainty in the markets, making it more difficult to provide robust valuations based on multiples of earnings or revenue.
We have a widely predicted recession on an unprecedented scale and uncertain stock market conditions. Furthermore, while private equity funding was in plentiful supply prior to the pandemic, it remains to be seen as to whether it will still be as freely available for acquirers going forward.
The M&A market may eventually need to agree on a valuation method that works for buyers and sellers to compensate for market uncertainty and future values.
In the short term, a buyer could make a depressed offer to take account of the current conditions, but the seller could insist that the deal takes into account any upside in terms of any future rise in value of the business.
This market has already survived regulatory change and the uncertainty caused by Brexit from 2016 to late 2019. With the effects of the pandemic still very much at large and the possibility of a no-deal Brexit later in the year, these are uncharted waters. However, the reasons to buy and sell are still there so both buyers and sellers alike will be keen to come up with a solution that sees a resumption in M&A activity.