Mergers and acquisitions  

Consolidator pays extra £5.4m for deals as values spike

Consolidator pays extra £5.4m for deals as values spike
Lee Hartley, chief executive of Fairstone

Mergers and acquisitions in the financial planning sector are enjoying a "perfect moment" in the wake of valuations increasing over the past two years, according to specialists in the market.

Commentators such as Lee Hartley, chief executive of Fairstone, and Louise Jeffreys, managing director at introducer Gunner & Co, have spoken of the "solidity" of acquired businesses, which are providing secure, recurring income fees.

Ms Jeffreys said the adviser M&A market was in a "perfect moment", with consolidation driven at ever greater speed and scale as a result of an ageing demographic of sellers and an increasing regulatory burden on small businesses. 

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The comments came as national wealth manager Fairstone told FTAdviser it has spent an additional £5.4m on acquired businesses that exceeded their initial target value over the past nine years. 

In earn-out data for the 45 companies integrated into the Fairstone model since 2011, one in six companies joining the company via its downstream buyout model received more than 135 per cent of its original sale value.

The downstream model sees the wealth manager take a stake in an advice business before integrating and then purchasing it.

On average, sellers received 111 per cent of the initially agreed price, with almost a quarter of advice businesses receiving more than 20 per cent above the original transaction value.

Mr Hartley said the national adviser had paid millions in additional payouts after finding sellers who wanted to grow their business, rather than completing a transaction before exiting. 

Mr Hartley said: "The ability of a business to secure the entirety of their earn-out payments is a major differentiator in the sector.

"Some large consolidators are delivering earn-out payments that result in an average of between 80 per cent and 90 per cent of the original headline price negotiated for those acquisitions – crucially this implies that some companies are getting even less than that." 

Undeterred by lockdown restrictions this year, Fairstone has confirmed a string of deals, gaining eight companies and more than £1.2bn in funds under management via its buyout model so far in 2020.

Mr Hartley said integration was the "foundation of any acquisition" and had to be handled first, not rushed after the sale.

The advice boss said dealing with integration post-transaction could often lead to "significant friction", which placed "undue burden on both parties", risking business disruption during the key early phase of an earn-out.

He added: "Buying businesses is easy, but integrating and creating one business with support of culture is difficult, and that takes time."

Lincolnshire-based Zimb Johnson Bespoke Financial Planning was acquired by Fairstone in 2018 and its former principal, Leigh Johnson, said he received 100 per cent of his sale value with "no fuss and no quibble".

Mr Johnson added: "I was pleased to have increased our profitability year-on-year because it represented a measure of very favourable client response and satisfaction.

"It was vital to ensure my clients' long-term interests would be assured. Equally, as the seller of my business, I was keen to ensure that the sale proceeds I expected to receive were actually likely to be paid."