Your IndustrySep 28 2015

Supply and demand drives adviser valuations to all-time high

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Supply and demand drives adviser valuations to all-time high

Valuations achieved by advisory firms being sold at the moment are at an all-time high, according to financial services consultancy Harrison Spence, which cited simple supply and demand dynamics for the trend.

The situation is evidenced by an annual snapshot over the last five years, built up through the industry research the firm undertakes to help its clients.

Historically, supply of advisory firms has outweighed demand, but this has turned on its head in recent years, with fewer firms for sale and demand from acquirers increasing.

Back in autumn 2010, the ratio of sellers to buyers was nearly 20 to 1.

By the end of 2011, that had dropped to around three sellers to two buyers.

At the end of 2012, a “rough parity” was reached, however at the end of 2013, for the first time, there were more acquirers chasing vendors.

In September 2014, the ratio of buyers to sellers was approximately three to one and today, that ratio has increased to 10 buyers to every one seller.

Brian Spence, managing partner at Harrison Spence, said it has been turning into a seller’s market for some time now, simply because there are fewer high-quality businesses for sale, while acquirers are anxious to rapidly scale up; so prices are naturally increasing.

“This demand has led to the standard valuation matrix for IFA practices increasing from around three times recurring income to four times – or an increase in valuations of around 25 per cent year-on-year.

“However, in our view, values are unlikely to increase much further as the maths simply doesn’t add up for acquirers at higher multiples.”

He told FTAdviser that the pressure is already ratcheting up for some acquisitive wealth managers, or ‘consolidators’, that have come to market slightly later in the game and are struggling to find the right deals.

As the ratio of buyers to sellers has jumped sharply in the last 12 months, the size of deals has also increased reflecting the considerable consolidation in the industry.

Mr Spence added: “We believe that if you’re thinking of selling, now could be the time, as there is likely to be less profit in it than in a year or two.

“Those playing the waiting game need to prepare to dig in for the long haul and invest considerable time and effort to grow their business – and target a profit valuation – with a medium to long-term horizon of five years or more.”

Those doing deals in the market appear to be putting a good face on things though, with European Wealth snapping up the financial planning business of legal firm Bells Solicitors for £675,000 recently and earlier this month, Attivo completed its seventh deal this year, for Surrey-based C R Toogood Financial Planning.

Bellpenny’s acquisitions director Dominic Rose told FTAdviser in June that he expects to complete another 10 adviser acquisitions before the year is out, adding to an already busy first half of 2015.

“We’ve got a strong deal pipeline, with our tenth deal of the year due to complete shortly and the same amount ready to be completed in the second half of this year,” he stated, adding that there are still good quality advisory firms looking to sell.

AFH’s chief executive Alan Hudson was also bullish in July, as his firm reported growing revenues and profits. He commented: “The directors’ continue to actively seek appropriately priced acquisition opportunities with a comparable culture to AFH to generate incremental opportunities for the group.”

peter.walker@ft.com