Most owners of financial planning firms are looking to exit the industry in the next three years , according to research by Gunner & Co.
The M&A consultancy firm said this came at a time when business valuations had jumped considerably, with businesses regularly selling for more than four times recurring income - up from an average of 3.4 times in 2021.
The study, which was available to business owners in the market, received 106 respondents during the month of February 2022 and showed 60 per cent were looking to exit within the next three years.
For 61 per cent of respondents, retirement was the key driver for approaching a sale. Business sales a number of years before retirement was also a popular reason with 38 per cent of respondents who said they were motivated by future proofing their strategic plan – growing from 34 per cent in 2021.
Other reasons for firms looking to exit included longer-term succession planning leading to retirement (14 per cent), realising capital to de-risk (17 per cent) and to a lesser extent selling all or part of the business to open the door to internal investment and future growth.
Gunner & Co said activity had been steadily growing, with a diversification of the buying market leading to increased deal values and momentum for sellers to join the M&A market.
Louise Jeffreys, managing director of Gunner & Co, said: “With new entrant buyers offering partial equity purchases, growth funding and more autonomy for the selling business – the M&A market is moving away from the dominance of consolidators we saw a few years back.”
Succession planning forms a significant part of strategic planning, according to 76 per cent of respondents which suggested that many firms in the sector are approaching the tail end of their natural life cycle.
Meanwhile, Gunner & Co.’s analysis found the total volume of companies only fell by 0.9 per cent from 2016 to 2021, so while exit planning is prevalent, this is not resulting in a net decrease in firms.
Jeffries said the growth in new entrant buyers and start-ups meant the financial planning profession may not see a significant decrease in the number of firms for some years to come.
“That said, I would suspect looking over a five year plus horizon, it is likely a smaller number of larger firms will dominate, as smaller businesses are either squeezed out due to operational pressures or exit for retirement reasons and mid-size acquirers merge to reach scale,” she said.
“Mergers, management buyouts and management buy-ins are notoriously hard to execute, despite often being an aspirational preference for business owners.
“Whilst they can afford the business a level of continuity, a consolidator-style buyer can't. They are fraught with challenges around identifying the right successor(s), agreeing the value and fund raising.”
When questioned on the type of buyer business owners would consider selling to, the majority preferred smaller scale buyers, with 63 per cent stating they would consider regional buyers and 37 per cent a small local option, down from 55 per cent in 2021.