A major new report from the Beaufort Group concludes that the way IFA firms are being valued has changed significantly, with a serious disconnect between the expectations of how firms are valued and the reality of what is offered.
The report is called Dispelling the Valuation Myths and was commissioned by national financial advisory and discretionary fund management firm Beaufort Group, together with corporate finance firm Asgard Partners and accountancy firm Taylorcocks.
The report is due to be published in full next week by the Beaufort Group at a Gunner & Co event (17 March, Thursday) in London entitled ‘Preparing for Exit: How to Build Value Now In Your IFA Business’ (for details email Louise Jeffreys).
The report examines recent deals and discovered that:
- profits were considered more important than recurring revenue as a valuation basis;
- tempting, but highly conditional offers may well leave vendors disappointed in the end;
- vendors continue to care greatly about the ability of acquirers to service their clients properly post transaction;
- limiting acquired advice risk remains a key concern for acquirers;
- vendor ability to prove rigorous controls, advice processes and compliance greatly enhances value;
- value lies in a strong brand rather than a collection of adviser silos.
The report states the main method currently used for valuing an IFA business is based on a multiple of profit. This is normally measured as EBITDA which excludes the amortisation of goodwill and recurring revenue. When it comes to the purchase and deciding on the right profit multiple, the report says that acquirers will factor in revenue and cost synergies over and above the intrinsic value of the business.
What’s more, the report goes on to say that high recurring revenue multiples remain justified only when:
- there Is a likelihood that client fees can be increased, or funds moved to an in-house proposition;
- an acquirer can realise substantial cost synergies, for example where premises can be closed and staff numbers can be reduced.
The original basis for valuing companies on high multiples of recurring revenue, expecting to increase on-going fees, has disappeared, mainly because most IFAs have now increased their fees post RDR.