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Top tips on valuing your IFA business today

Photo of Debbie Dry, Head of Integration at Wealth Holdings
Photo of Debbie Dry, Head of Integration at Wealth Holdings

Whatever method is preferred, many additional factors will be considered which may influence the valuation, payment schedule or conditions contained within the Sale and Purchase Agreement (SPA) or Asset Purchase Agreement (APA) including:

  • Age – this always comes up and the general consensus is that clients aged over 75 has less value to the acquirer because the expected duration of the revenue stream is less due to the life expectancy of that client. There are exceptions to this where the seller has an intergenerational planning model and can demonstrate a relationship with the client’s children/family group.
  • Geography – sellers will often state that their clients are all based within a ten mile radius of their office! We ask for a post codes so that we can demonstrate this to a buyer. Generally speaking, clients that are highly concentrated geographically, tend to be valued more than those with a wider spread. That’s because they will be more time consuming for the acquirer to visit and less likely to attend meetings at the office.
  • Portfolio Valuation – generally speaking, a higher client average portfolio value is worth more to a buyer. For example, having 100 clients worth £250k each = £25M of assets under management. However 1000 clients worth £25k each = £25M of assets under management. That’s ten times more work for the latter for the same revenue. Some buyers have a cut-off for which they won’t include clients in the valuation – for example, all clients or households generating less than £300 per annum aren’t included. Some don’t impose this as they see value in re-engaging with those clients and trying to cross-sell or otherwise uplift the fees. I always look for outliers too. For example, I recently saw a client bank with £30M under management but £10M was with just one client. I would suggest to a buyer that they impose additional terms in the SPA/APA relating to that client. If the client left in the first year they’ve potentially lost a third of the income they just acquired.
  • Fee Rates – this is an interesting one and different rates can be attractive to different buyers. For example, on the face of it, a client bank which generates fees at 1% has the most value based on a multiple of recurring income. However, if the buyer is only charging 0.75% within the acquiring business, then a client bank at 1% may not be of interest at all because they may have to reduce the fees of the acquired clients to integrate them into their current model. On the other hand, an acquirer can often see more value in a client bank with a lower charging structure, say 0.5%, because there is immediate potential to uplift the fees, matched to the new service they provide, and increase revenues without taking on any additional clients. The fee rates should be looked at in conjunction with the investment proposition – as I’ll explain in my next point.
  • Investment proposition – buyers will invariably have their own central investment proposition (CIP) and we need to assess the compatibility of this with the sellers’ current models. For example, a firm which believes strictly in an active investment approach may not find value in a client bank invested purely in passive funds. If they were to realign the clients to their preferred proposition, there is a real risk of client attrition, or they continue to run a proposition they don’t believe in. If a buyer or seller are completely committed to a particular investment strategy we need to match them carefully with someone with a shared belief. The costs also need to be looked at – if the current investment costs vary greatly then consideration needs to be taken of the impact of the client and acquiring business model. This needs to be looked at in conjunction with the client proposition and fee charges to ensure the acquiring business can run an efficient business model and still retain the clients.
  • High risk business, eg. DB transfers. This may affect the structure of the deal – for example a buyer may prefer an asset purchase so as not to take on a historic liability like this. However, because of the tax treatment to the seller and the bigger hit they will be taking, the buyer may need to pay a premium for not buying the shares which indirectly affects the valuation. Complicated, but I hope that makes sense!
  • Regular withdrawals and drawdown clients – if the bulk of the clients are in income drawdown or taking regular withdrawals that may affect how the assets are valued. That’s because if we can see now that the AUM will be halved in 5 years due to known withdrawals then that would be worth less than an accumulating client bank.
  • Provider spread – this doesn’t necessarily impact on the valuation, but it is preferable to a buyer for a seller to have a smaller spread of preferred product providers. If the clients’ assets are predominantly on one or two platforms, then it’s easier for the buyer to integrate into the acquiring business – fewer procedures for their back office team to learn and become accustomed to using. If the assets are spread across multiple providers, then this can be messier.
  • Product spread – this is important to look at prior to purchase to see if it’s compatible with the buyer’s CIP – for example some investments are not readily available through certain platforms/products or if the plan is to move assets onto a preferred platform or investment solution then some assets are harder to move – for example, offshore bonds or trusts, which might make the assets less valuable to a buyer.

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