Before an IFA decides who to sell its practice to, the first step usually involves calculating the value of the business and holding informal discussions with buyers.
Putting a price on the value of an IFA involves a few stages.
As Giles Dunning, financial services mergers and acquistions specialist and partner at Stephens Scown, points out: “Consolidators are very adept at acquiring IFA businesses – it’s what they do.
"The complexities of acquiring a financial services business should not be underestimated.
“Most transactions begin with informal discussions between the main principals, this can be instigated by an unsolicited offer from a larger acquirer."
He adds: “Or it may start as an approach by vendors to one or more acquirers, or could even take place over a number of years between firms who develop increasingly close relationships and synergies.”
But how does an IFA decide the price at should sell at?
Scott Gallacher, chartered financial planner at Rowley Turton says: “IFA businesses tend to be valued [based] on one of three ways.
"[These include] a multiple of ongoing advice charges, a multiple of profit or as a percentage of Assets Under Advice.”
Mr Gallacher adds: “The actual multiples may vary depending on the purchaser and the exact makeup of the selling IFA firm, and each of the valuation methods could produce a different value.”
Mr Dunning, highlights that most transactions in the IFA space are different from each other.
“Every transaction is different and vendors and acquirers need to seek their own valuation advice to ensure they are getting the best deal.”
He adds: “An alternative, particularly where an acquirer is concerned about underlying profitability, is to use a multiple of earnings.”
Even though there are only three main ways in which IFAs calculate the value of their businesses, there are several common mistakes that can be made, according to commentators.
Stuart Dyer, chairman of Soprano Consulting cautions: “Sellers listen to ill-informed comment about pricing and usually overestimate rather than underestimate the value of their business.”
He adds: “Sale price is driven by a number of complex factors and no two businesses are the same.”
However, once they are in sale discussions, they can get carried away by the price and ignore other terms of the agreement, and end up selling themselves short.
Mr Dyer says: “In general, buyers will look at the impact of the acquisition on their profitability - what are the cost and revenue synergies that they can expect from the acquisition.
“This is sometimes translated into a simple 'multiple of recurring income', but that has very little relevance to most buyers - it is a shorthand way for sellers to make sense of the price they are being offered,” he adds.
Research from Soprano Mergers and Acquisitions shows that historically between March 2016 and February 2020, financial advice firms were acquired at a multiple of 9.3 relative to the firm’s Earnings before interest, tax, depreciation and amortization (EBITDA), a measure of a company's operating performance.