Continued IFA consolidation leads to landscape change

  • Describe some of the challenges involved with selling a business
  • Describe how a firm gets valued
  • Identify some of the precautions advisers have to take in this context
Continued IFA consolidation leads to landscape change

Independent financial advisers are hotly sought after and competition has increased among buyers.

Where previously traditional large consolidators made up the majority of buyers, others are now making bigger plays in the market.

The larger regional firms are buying up smaller firms and more recently, private equity firms are seeing IFAs as a very attractive place to put their money.

Since the Retail Distribution Review, adviser earnings have increased as a result of ongoing charges. In the past year their value has jumped by 10.9 per cent – the highest value growth recorded for IFAs in the past six years.

But while advisers are enjoying this courting period, M&A experts warn there are a number of actions they need to take to protect themselves.

DB transfers

It goes without saying that a clean compliance history and a healthy book of recurring income are attractive attributes.

But a big stumbling block for businesses that want to sell will be when they undertake a significant amount of defined benefit transfers, says Stuart Dyer, consulting founder of M&A advisory business Soprano Consulting.

Buyers are worried about the future liability for a company that does or did DB business. 

So they will seek warranties and indemnities from the seller, the most important indemnity being liability for past advice.

Over the past year there has been a shift towards buyers making a share purchase, rather than an assets purchase. This helps sellers with their capital gains tax position, but it means buyers are inheriting the liabilities for past advice, and so most will look to protect themselves.

There will be restrictions on the timescale over which that indemnity applies, which can often be a matter for negotiation.

Mr Dyer says: “Agreeing the timescale is quite important. [Another consideration is] under what circumstances would a claim fall on the seller? 

“In normal circumstances the buyer will extend professional indemnity cover to the claim and the seller is usually only liable for any excesses, but that is not the case in all circumstances.

“Those that have undertaken a lot of DB transfer activity, are likely to be subject to a much higher degree of due diligence, as a result,” he adds.

Key points:

  • Regulation is driving businesses to sell
  • DB transfer business can put off buyers
  • The number of smaller IFAs are expected to reduce as the M&A boom continues

“Buyers spend a lot of time looking at that in enormous detail. It slows the entire process down.

“It is certain that there will be a specific indemnity against any liability arising. The excesses on DB transfers are likely to be high and in some cases, it may be impossible to get professional indemnity insurance on certain types of DB transfer business.”

Despite this, it does not mean the business will not sell, but it is likely to be a long and bumpy road.

Clayton Witter, an associate partner at Harrison Spence, says: “It depends on the due diligence. It is more about the risk that sits in your book.