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IFAs face tougher acquisition market as client banks dry up

by Jun Merrett on Jan 28, 2013 at 11:40

IFAs face tougher acquisition market as client banks dry up

There has been a flurry of IFA acquisitions in the past few months, with some advisers leaving it to the last minute to leave financial services due to the implementation of the retail distribution review (RDR). But now the RDR deadline has passed, the acquisition market looks set to become tougher because many advisers who had no choice but to sell up have already left the market.

With the client bank acquisition model now less viable and pricing levels less certain, acquirers are gearing up for a different approach.

David Williams (pictured), managing director of Cheshire-based Jones Sheridan Financial Consulting, proved a keen acquirer of IFAs last year. He is aware the market in 2013 will be tougher.

The firm bought five client banks in 2012, typically paying three times recurring revenue, but Williams said the price and type of any acquisitions consolidators made this year was likely to change.

‘Ultimately, the consolidators can only offer a different pricing model. I see that as going from a multiple of three times recurring revenue to four-and-a-half in 2013,’ he said.

Shift from client banks to firms

Williams said that although his firm had been able to exploit a wave of retiring IFAs selling their client banks last year, this option was not as available in the RDR world.

‘It’s not been our preference [to buy whole businesses] up to this moment because there has been more opportunity in client banks, but I think it will change,’ he said.

‘We will see more advisers who want someone to buy their business but keep them on because they’re qualified and RDR-ready but perhaps not as profitable. Those people will either choose to be bought or go down the network route.’

The shift from buying client banks to acquiring firms will bring added potential perils, predicted Bellpenny, which has been the busiest consolidator in 2013, taking on £400 million of assets. Chief executive Kevin Ronaldson (pictured below) said acquirers would need to be wary of the liabilities they could be taking on.

‘Buying businesses becomes difficult because it’s hard not only to ascertain the value of what you’re buying because there may be debt, but also there is the possibility of claims from clients and there is the potential the adviser advised in areas they shouldn’t have. There is far more commercial risk,’ he said.

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19 comments so far. Why not have your say?

david mann

Jan 28, 2013 at 12:42

Paying 3 times legacy trail (never mind 4.5) is commercial suicide in the post RDR world as providers look to switch off the trail and' trigger' events cause it to stop.

gets the turnover numbers up (and PII and FSCS costs) but profitability negligible.

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One is afraid

Jan 28, 2013 at 12:42

Goody Goody - price just gone up

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Gav

Jan 28, 2013 at 12:56

So...more advisers are leaving and its harder to start up in the business (reducion in advisers)...new income (clients) is harder to come by and old income is reducing (switch off of trail) ....and to quote "Buying businesses ..it’s hard...to ascertain the value of what you’re buying because there may be debt" ... "there is the possibility of claims from client"..... "There is far more commercial risk".....

....and somehow this equates to HIGHER prices from 3.5x to 4.5x for existing client banks?

Brilliant !?!?!

Eh?

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philip brown

Jan 28, 2013 at 13:19

This is fantasy economics. Accountants can be bought for 1.25 X recurring fees, which is what IFA firms will go for in the future.

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Ewart Matthias

Jan 28, 2013 at 13:30

Seems like a 'false hope' message in an attempt to get enquiries to me.

No way were consolidators getting 3 times even in 2012 and with the change in legacy requirements post RDR it is unlikely in my opinion that businesses will be old with any reference to client banks, which in itself will drive down values.

I believe the only sure way forward for those still wishing idiot the business is to merge with another and have a program and contract for share of new busies sand legacy trail.

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mr h

Jan 28, 2013 at 13:30

the multiples we bought for were between 1.25 and 2 times in 2012.

this will continue although lower slightly in 2013.

very few practices with cash.

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Ewart Matthias

Jan 28, 2013 at 13:34

Apologies for the typos (damn iPad). 'idiot the' should have read .'to sell their business'.

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Chucky

Jan 28, 2013 at 14:04

I disagree with most of the above comments, if you have been working on a fee based model for a number of years and the ongoing service fee is maintained, which of course it will be, if it is a fee for a genuine ongoing service, then you would expect to command between 4 and 6 times the ongoing service fee. On the downside to this i do not believe that TRAIL COMMISSION which of course is not an ongoing sevice fee will even be considered as part of future IFA buyouts and nor should it be. The 1.25 and 2 x multiples are clearly to buy a customer base of a IFA, not to buy a properly managed IFA practice.

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Dante

Jan 28, 2013 at 14:19

An acquirer paying 4x+ for trail is not going to be in business for long and would give concerns re ability to pay deferred consideration.

More disturbing would be a buyer who themselves have discovered the difficulties of consolidating the diverse mish-mash of firms they have acquired,, have put themselves up for sale and are talking about continuing to acquire in 2013.

Caveat venditor!

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Vinylman

Jan 28, 2013 at 14:47

4 - 6 X recurring is nonesense, 2 Xis max with genuine good quality business, most at 1.25 - 1.5 and on the drip.

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Bob Donaldson

Jan 28, 2013 at 15:01

The big problem for the seller is how is the money paid for the business. A lump sum up front or over a period of years. Where does the liability for the advice lie, do they buy the business or the client bank.

So many promises have been made in our industry by numerous companies and individuals regarding buyouts how many are reliable how many have come to fruition and how many have been to the benefit of both parties.

I would be interested to know of anyone who has successfully negotiated these shark infested waters.

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Chucky

Jan 28, 2013 at 15:16

I am not talking about recurring trail commission i am talking about genuine ongoing fees in a wholly fee based business that brings in hundreds of thousands in ongoing fees, 4-6X for this type of business will be the norm mark my words. I would expect a sole trader with no genuine fees to give that business away to mitigate future liablilties, never mind them getting any money for it

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alan mcintosh

Jan 28, 2013 at 15:33

Valuations are a contenious issue,but for fee driven business,the values are now looking slightly enhanced.This again is dependant on the model of the business eg claims history typeof client etc.

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Anitaki

Jan 28, 2013 at 15:34

@ Bob D

I have

Stage payments and a clear contract was the answer. It worked fine

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Andy Snook

Jan 28, 2013 at 16:15

One of the (many) issues is that a number of propositions have drawn a line above which they will only see clients who they know have investments of £x and earnings of £y to cover the remuneration charged, thus reducing their client bank. But how do they know what a client can or cannot afford unless they undergo a sense-check first?

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The ssinnic

Jan 28, 2013 at 17:05

And we all know of firms acquiring ifas with a 50% down payment, with balance over 3 years, only for the hapless seller to find the acquirer going into liquidation, and ....surprise surprise...starting up again under a new name, right under the nose of the FSA and effectively getting the business at a 50% discouint!

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James Marchant

Jan 28, 2013 at 17:30

I'm with Philip Brown on this - a sanity benchmark would be to look at accountants which as Philip says go for around 1.25 - 1.5 x ongoing fees. Quite how an IFA client bank could be worth any more than this is indeed fantasy economics!

Furthermore, how can a client bank based on trail commissions have any upfront cash value post RDR? An agreed payment on the drip maybe but anyone who pays anything upfront for a trail commission client bank is quite frankly mad in my opinion!

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Graeme Laws

Jan 29, 2013 at 11:06

I've only skimmed this lot, but I don't think anyone is talking about profit. In the real world, businesses are valued on a multiple of earnings basis, with adjustments for balance sheet strength, or weakness. A business with a big turnover that loses a bundle will not command much of a price.

Virtually all the big IFAs have fallen to bits in one way or another. Hardly any have ever made any money. Providers have lost oodles of dough in Interalliance, Millfield et al. Yet people still try. And until they can think of a way to attach the client to the firm rather than to the adviser they will continue to fail.

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Patrick Isaacs - Berkeley Cannon

Jan 29, 2013 at 18:23

I disagree with the content of this article. Berkeley Cannon completed on 42 transactions in 2012 with c80% being asset based, 20% share based. I know most of the people being quoted and the true multiple is 2.8 - 3.5 x recurring income, depending on profit in the business at completion and opportunity for increased profit post deal completion. There are creative acquisition models that deliver a much higher multiple but they come with risk for the seller. Owners who sell for 2x are gifting their business to the buyer. Sellers who expect 4.5x for a conventional sale will be waiting a long time to sell. You can get that, but it will probably be based on moving funds from 0.5% to 1%, will mean going restricted and come with a host of caveats.

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