5 years ago the balance of firms coming to market for sale was very much weighted to single adviser retiree businesses – these firms continue to be motivated to leave the sector both due to age and also the pinch of the regulator, but we’re also seeing bigger more sophisticated firms coming to market.
The makeup of these bigger businesses and the aspirations of the principals are often very different from those of retiree businesses.
Retiree business are still very well serviced by both national consolidators – typically vertically integrated firms which can offer their clients a much broader range of services, and local players who perhaps have a closer cultural feel.
Something I am passionate about when helping a business to plan their eventual sale is understanding how they can be as attractive as possible to as many buyers as possible. That way an adviser can pick the buyer best suited to them.
There are a few determining factors less in their control, such as where they are and the overall size of the firm; however a key theme in attractiveness is the average investment per client – obviously the higher the investments, the more profitable the client and the more services an advisory firm could offer.
Similarly, in the past buyers would be interested in advice charges – this has shifted more to total expense ratio, with the aim to match or reduce this figure for the client. On the flip side, a couple of factors can really complicate things – self-employed advisers being one of them.
Very few large buyers support self-employed contracts. Therefore, if an adviser is targeting a larger firm, they will need to have bought or exited these individuals. Equally, poor reporting, inaccurate and vague data sends negative signals to a buyer.
COVID: prices are holding up – buyers remain keen and current offers are in line with 2019 averages
As we know, profit was only used as an offer approach in 10% of cases in the last 2.5 years. And since Covid-19 we have only had one offer based on profit.
The corridor is 5.5-6.5X adjusted profit. Some buyers quote they will offer up to 7 or maybe even 8 X profit; however in reality, the sweet spot is nearer 6-6.5X.
IFA businesses tend to be very high-margin businesses, some even in excess of 50%, which normalises what may seem like low profit valuations when you compare them to, say, the tech industry, where over 10X is common.
In essence, the cost-base of a financial planning business is well-controlled and not headcount heavy, delivering great margins for what are typically owner operators.
It’s important to note that any profit multiple will be based on ‘adjusted’ or ‘normalised’ profit. Given many businesses in this sector are owner operator, the cost base in-house does not generally reflect how it would be shaped in a larger organisation, and therefore at the point of valuation.
The main motivation where individuals want to remain in the business is to release capital and derisk, whilst also having a longer-term exit in mind, normally 5-10 years.
