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.
Platform for growth
Alongside those dangers, however, acquisitions of firms rather than client banks can provide a better platform for growth, according to Rob Stevenson, director of business consultancy Kingmakers Group.
‘If you buy the shares of the company, you get the whole business, so you’re getting intellectual capital, intellectual property, staff and adviser relationships. I think if you’re buying shares of businesses, you’re serious about growing your business,’ he said.
The amount of work involved in completing an IFA acquisition meant only those businesses with a turnover of £1.5 million or more were viable targets, he said.
Assessing potential targets
Turnover is likely to come under pressure in 2013 due to the RDR, so acquirers will need to be careful in how they assess potential targets, according to David Hesketh, group mergers and acquisitions manager at consolidator Perspective Financial Group.
‘You can buy a business in a post-RDR environment but there is a risk that you value it on the pre-RDR trade because it’s early days,’ he said. ‘Some IFAs will reduce turnover post-RDR because they will reduce charges and other issues, so you have to be careful when using pre-RDR figures.’
Towry chief executive Andrew Fisher (pictured below) argued this trend would lead to lower prices for businesses in 2013, despite the departure of IFAs from the sector in the run-up to the RDR.
‘People looking to get through the RDR in terms of qualifications may not have looked at their business models. Certainly a number of firms will operate a model that requires a number of changes, so that means a reduction in their overall income,’ he said.
‘I expect the cost of regulation and systems infrastructure to go up this year, so if you’re breaking even, your revenues have gone down and your costs are up, you are making a loss, which makes it less attractive.’
Different perspective on pricing
However, Hesketh said he anticipated the prices Perspective would pay for businesses in 2013 would be broadly in line with 2012 levels, as it had always targeted firms that were ready for the RDR.
Perspective typically pays three-and-a-half times a business’s profit when acquiring firms, and between two and four times recurring income when buying client banks. It has made 31 acquisitions since its launch in 2008, and is targeting nine more in 2013.
‘There are some acquirers that were very focused on acquiring IFA practices that weren’t RDR-ready. You will see those were very busy over the past few years but they won’t be so busy over the next couple of years,’ Hesketh said.
‘There were some that were wanting a bit of a bargain, but as the number of sellers has gone down, there will be a reduction in the number of those buyers on that basis.’