Gunner & Co has outlined the six key things that buyers consider most valuable when looking to acquire an advice business.
In a webinar today (December 7), Louise Jeffreys, managing director at Gunner & Co, outlined six value drivers for buyers.
She listed these as: geographic location of clients, profitability per client, number of advisers and support staff, TER and charging structure, investment approach and compliance; and staying or going.
However, Jeffreys explained that some of these will be out of a firm or adviser’s control.
“If we take, for example, the geographic location of your clients, it is probably not a surprise that if you are based on the Isle of Skye it will be more challenging to find a breadth of different types of buyers than if you were in London,” she said.
“There are certain things that you can't control. There are other things within the mix that absolutely you can have an influence on.”
Profitability per client is probably one of the most important factors that a buyer will be looking at when they are assessing the attractiveness of a business, she explained.
Ultimately, they are always assessing based on the return on investment, not just simply the opportunity to take the business and run it as it has been.
“It's about the growth opportunities,” she said. “The starting point, understanding the profitability of each client and therefore the balance and cost of service delivered versus charges received from that client - that has a big impact on the attractiveness.
“A simple way that we can benchmark or come to an understanding of what good looks like is by looking at the average portfolio size of your clients.”
She explained that if a firm has got £100mn under management and 100 clients, that is an average portfolio size of £1mn.
“The average portfolio size ultimately leads to an understanding of how profitable a client may be,” she said.
“We often see that business buyers have a starting point, a benchmark of where they're willing to start considering a business for sale that is often in the £200,000 - £250,000 average across clients.
“We're not talking about individual clients with £100,000 or sons and daughters with £50,000.”
Charging structure
Jeffreys explained that 10 years ago, when she would interview buyers coming into the market, a lot of them would say things like: “I want to buy businesses where the average adviser charges 0.5 per cent because I charge 1 per cent. What I'll do is I'll buy it and I'll move all of the clienrs onto this charging structure and I'll make more money”.
However, that doesn't really work anymore, she said.
The Financial Conduct Authority have been cracking down on this - especially with the consumer duty - but specifically in terms of making clients more aware of the fees and the service that they get.
“The option of just bulk changing client fees without necessarily giving an increased service or a better proposition doesn't exist anymore,” she said.
“What we're really interested in is the total expense to the clients. It might be that you're looking at a buyer with a different charging structure to yourself but what we're interested in is how to ensure that the client doesn't end up worse off.”
Staying or going
This is a really big consideration in terms of exit planning and succession.
Jeffreys said many business owners will talk to her about the option of ultimately wanting to retire but perhaps working with a buyer for a period of time.
One of the reasons why somebody might want to do this is because they believe they can better transition the clients to the buyer and therefore they would then be more likely to stick long term.
“Some buyers would be a little concerned that if that relationship isn't broken in a timely and appropriate way, then actually it can leave the clients more dependent on the exiting adviser,” she said.
"When we're talking about value, the point where you want to sell your business with a certain amount of cost base going alongside it, then the buyer is going to have to consider that in terms of the offer that they make.”
In the case of buyers that are buying retiree businesses, it's very often because they have financial planners sitting in seats who are not at capacity but they are already earning a salary.
Jeffereys explained that therefore it would be ideal if the buyer can buy the business and, with the right transition and handover, give this adviser more clients.
Valuation and exit options
Jeffreys outlined some of the exit strategies that are available for advisers, specifically listing three types.
She also explained that it’s important the market understands where the trends are.
Looking at both recurring income and adjusted Ebitda up until the end of October, she said what is “glaringly obvious” is that there has been pressure on the recurring income approach to valuation.
At the end of 2022 when the firm analysed all of the deals that it had received offers on and all of the deals that went through, it found there was an average of four times recurring income.
“If you go back as far as 2018, the trend was very much in that three and a half times so actually we had this one moment in time spike and then numbers have fallen back.
“We have certainly seen pressure of interest rates and the cost of debt to business buyers.”
Jeffreys argued she is seeing more of a trend where recurring income is most commonly used for small, single adviser firms or smaller firms where the business is selling without the buyer taking on a significant cost base.
“We have seen pressure in terms of the attractiveness of this type of deal in the market,” she said.
“We certainly have a contingent of buyers who would say that they are looking for deals that can move the dial.”
sonia.rach@ft.com
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