Mergers and acquisitions  

Consolidator pays extra £5.4m for deals as values spike

The wider market

In recent months, broker predictions have suggested deals in the advice industry could be set to spike next year as advisers choose to hand responsibility of their business to larger companies in the wake of the coronavirus pandemic. 

Gunner & Co's Ms Jeffreys added: "The solidity of these firms, led by secure recurring income fees, tempts ever more buyers into the market.   

"Investor buyers are particularly interested since the consolidation trends allows the businesses they invest in continue to grow through acquisition."

Data from Gunner & Co found valuations increased in the sector by 16 per cent over the past 24 months, with an increasing multiple being secured by the bigger businesses coming to market. 

Ms Jeffreys said there was "plenty of scope for upside" in the current M&A market, but much depended on the structure of the deal: "If you are prepared to take more risk, you may receive a greater sum, either initially or over the term of the deal.

"There are many transactions where sellers are achieving above 100 per cent of the initial valuation when all factors are taken into account.

"Some acquirers will pay more where the business has grown during the integration phase, perhaps even before the initial payment is made, therefore it might be better thought of as paying proportionally more for a bigger business, as opposed to a bonus.

"That said, other acquirers will cap the deal value at the initial valuation of 100 per cent, particularly in retirement transactions, but this may provide additional security."

Ms Jeffreys added the potential for upside was usually linked to a longer-term deal structure, with expectation for a run-in period of integration prior to the initial payment or a longer earn-out payment schedule.

Alongside bigger advice players, private equity investors are increasingly looking to the financial advice sector as an option, which many believe offers attractive characteristics and a certain return. 

It comes amid predictions financial advice is set to become more in demand than ever as the coronavirus crisis prompts consumers to address their finances and later-life planning.  

Stuart Dyer, chairman at Dyer Baade & Company, said there was "wide disparity" over the structure of deferred consideration payments in the market. 

Mr Dyer said deferred consideration could be based on recurring or total revenue post-transaction compared with pre-completion level, the loss of any "client value" post-transaction or the profitability of the business post-completion.

He added: "As far as the deferred element is concerned, the certainty of payment will be influenced significantly by the structure of the transaction.

"For example, 'sell and stay' will logically drive lower client attrition than 'sell and leave' models."