Advice firms are being touted to sell earlier and are increasingly being valued based on profit multiples as opposed to the historic income multiples, according to data by Gunner & Co.
It revealed a major trend of 2020 was the increasing number of investors entering the advice market through a ‘buy and build’ approach - in which the selling firm is still growing and the buyer expects it to continue doing so, often with its principal remaining in place.
This is as opposed to a sale which takes place at retirement, when the buyer will not necessarily expect much growth and will expect the principal to leave the business.
This trend towards 'buy and build' among consolidators is leading to advisers selling earlier and an increase in profit-led valuations rather than income-led.
The data from Gunner & Co’s deal tracker, updated to the end of June 2021, provided insight into the structure and approach of offers being made in the IFA sector.
Louise Jeffreys, managing director at Gunner & Co, said: “A trend we’ve been seeing over the last 18 months is the rise of what I've been calling consolidated start-ups. If you just look at IWP, for example, I think they're probably about £5bn under management after two years and it is a very different model.
“The increasing entry of consolidator start-ups opened up a market for sellers who wouldn't have been selling five years ago because there's a lot more opportunity to sell your business as a going concern as opposed to selling your business as a retiree to a consolidator.”
The reason for this shift to 'buy and build' is because there are no big expectations to consolidate, Jeffreys explained. Instead, buyers are saying they want to buy the whole business but would like the adviser as the principal to remain in place leading the business.
Buyers are saying they want a significant amount of a culture to stay as it is and a significant amount of the standard operating procedures to stay as they are, such as the centralised investment proposition and platform.
Speaking to FTAdviser, she explained that while more firms are being bought on the ‘buy and build model’, this has seen a shift towards profit-led valuations.
"Income multiple, such as recurring income is much more appropriate with retirement, where a buyer isn't taking on the cost, and the clients will be consolidated into the buying business,” she said.
"We are seeing a lot more profit based valuations being used. The reason why we're seeing that so much more is because we've got these new entrants buyers who are buying the business as a going concern and therefore, they are taking on all the costs of that business. So the sensible way to value it is profit."
Profit-based multiples now account for around 20 per cent to 30 per cent of deals in the IFA market – a marked step away from recurring income.
The Gunner & Co report said the shift to profit multiples is a reflection of the increasing sophistication and professionalism in the buying market.
Share purchase multiples also peaked in 2020, hitting an average of 6.2 per cent but these numbers have dampened slightly so far in 2021, despite some stand out transactions in Q2.
Asset purchases have accounted for only 7 per cent of profit-led offers over the last 18 months, although the multiples are fairly aligned this year.
Jeffreys said: “Firms or advisers are kind of being courted to sell earlier and they're selling on their profit model as opposed to any income multiple which was what was historically the case. Income multiple, recurring income was much more appropriate with retirement sales where a buyer isn't taking on the cost.
“When the sale is effectively a going concern as a business continues to operate, it's not appropriate for the buyer not to consider how much it is going to cost that buyer to continue running that business.”
sonia.rach@ft.com
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