Prudential Regulation Authority  

What might drive adviser activity in 2018

This article is part of
Guide to buying and selling a firm in 2017

What might drive adviser activity in 2018

Price has always been a key factor in selling a firm. An adviser retiring and wishing to live off the proceeds will of course want the best possible multiples.

There were high multiples on offer immediately after the retail distribution review came into force in 2012 - some even up to 12x renewal - and headlines at that time suggested these might not be around for long, especially with the death of trail commission.

However, according to Henry Blunt, managing director of Retiring IFA, multiples of earnings before interest, tax, depreciation and amortisation (Ebidta) are still strong - up to 12 times in some cases and up to four times recurring income.

He avers: “Multiples are definitely not coming down. If anything, for a business interested in finding the opportunity for the right price, they are increasing.”

Mr Blunt says where some price pressure has appeared, this is where there have been serious underlying reasons.

For example, he says: “Businesses selling due to a regulatory reason will experience lower prices.”

Keith Richards, chief executive of the Personal Finance Society (PFS), outlines what sort of calculations might be applied when valuing a company.

He says: "A normal range for transactions could be set at 12 to 14 times earnings before interest, tax, depreciation and amortisation (Ebidta). A multiple of approximately 8x can be considered a very broad average for public companies in some industries. 

"For private companies, it will almost certainly be lower, often closer to around 4x. IFAs, meanwhile, will typically be valued on their recurring income, which is between 2.5 and 4x the annual amount.

"In recent years, acquirers have become more sophisticated in the way they calculate value. They are examining closely not only profit and loss, but also the risks associated with the business, how many advisers they have and the age of their client base."

So the actual price may depend on a lot more than a simple multiple. 

Mr Richards adds there is also a growing emphasis on the level of recurring fee income received, which puts the onus on the seller to make sure their profits are as rosy as possible.

He says: "The most lucrative strategies expect to see a firm where at least 50 per cent of turnover includes annual recurring income."

According to the PFS, some acquired businesses will typically receive a multiplier of known recurring income between 2.5 and 3.5, while bought-out owners could also receive introduction fees of 20 per cent.

But the most common deal is a 'clean break', where sellers get 50 per cent payment of goodwill upfront, usually three or four times recurring income, with the remainder paid over a 24-month term.

Other elements

But while looking for the best possible price, an adviser must not forget the quality of the buyer and the culture of the new firm has to be right: the clients need to be looked after well, not dumped on any old bidder.