M&A focus to shift to large advisers due to cost

M&A focus to shift to large advisers due to cost

The substantial costs faced by buyers of advice firms could mean small advisers will be increasingly overlooked in the M&A market, a broker has said.

Louise Jeffreys, managing director of broker Gunner and Co., said the fees charged to buyers by brokers to identify acquisition targets could be as much as £100,000 on a £3m purchase.

Buyers then face a cost for the due diligence on their target, which Ms Jeffreys said could be as much as 20 per cent of the purchase price.

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This comes after it emerged wealth manager Tilney spent £1.7m on assessing potential acquisitions in the 2018 calendar year, up from the £400,000 the firm spent in the previous year. 

Ms Jeffreys said: “[Buyers] probably wouldn’t make share purchase offers unless the business was more sizeable, depending on how much they want to win the deal.” 

Broker fees are usually only paid if the deal is completed, though due diligence costs would typically have to be paid even if the deal does not complete, said Stuart Dyer, who runs M&A consultancy firm Soprano and is a former chief executive of Cofunds.

He said: “Lead advice is usually a combination of a smaller fixed fee and a contingent fee based on the deal completing and introduction fees are only paid on success.

"Accordingly, costs of aborted deals will depend on where in the process a deal fails. If it is early, for example, failure to agree heads of terms, then abortive costs will be quite low.

"However, if there is failure at a late stage, for example during due diligence or during detailed negotiation of acquisition documentation, the costs can be heavy, with the only saving being contingent elements.”

Smaller deals are more likely to attract an introducer fee than very large ones because it is more likely that they will need to be introduced, said Mr Dyer.

Integration can also be easier between large firms due to the resources available to them, according to Ms Jeffreys.

She said: “Post-completion integration is typically done in house, so principally employment costs. 

"Most large buyers have people solely working on the various elements of integration, such as client novations and client communications.”

Advisers have been quite active at consolidating businesses in recent years and there have been some very large deals.

Quilter for instance bought listed advice business Lighthouse earlier this year in a deal worth £46m, while Tilney is currently in talks to buy rival Smith & Williamson in a move that would result in a firm with a combined £45bn in assets under management.

Jason Hollands, managing director for business development and communications at Tilney said: "We have an in house mergers and acquisitions team, and we tend to focus on bigger, strategic deals.

"We don't have a target for the number of firms we want to acquire, as some others do. But we don't tend to focus on the two or three adviser types firms.