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Are advisers getting fair value for selling up?

The acquisitions market has many pitfalls for both advisers and acquirers

With the list of potential suitors growing, advisers may be more tempted than ever to sell their firms.

Whether they want to retire or just take a step back from management, advisers have plenty of options; they can turn to household names like Old Mutual Wealth or Standard Life, or to newer consolidators like Bellpenny or Fairstone.

But are the deals on offer worth the price? Money Marketing delves into the mechanics of buyouts to see where advisers are cashing in and losing out.

Ballpark figures and bonus buyouts

Acquirers rarely disclose the price they paid when announcing their latest deal. It can also be tough to follow the money trail back to the precise amounts handed over for each firm in company accounts.

It is not just household names who are getting in on the action; Money Marketing is aware of one national IFA currently lining up shareholder funding to target 10 small IFA acquisitions this summer.

But market insiders have shed light on how the deals work in practice.

Adviser acquisitions broker Capital and Trust chief executive Patrick Isaacs says advice firms will typically be valued on their recurring income, between 2.5 and four times the annual amount.

This means advice firms trade on a premium to accountancy firms, which commonly only receive offers equivalent to one year’s recurring income.

Spreading payments over periods such as the 12th, 24th and 36th month will tend towards a higher acquisition value, as will any other lengthening of the owner’s earn-out period.

Isaacs says he has seen instances where a business has been sold over a period of eight or 10 years, and the payments almost act as a pension for the seller. The goal for the buyer is usually to make their money back in around five years.

He says one factor that will take firms towards the top of the valuation scale is the opportunity to increase profits once the deal completes. This can take the form of increasing charges for advice.

Isaacs is adamant this cannot be allowed to happen without an equivalent improvement in range or quality of client service, and should not rise above a normal “acceptable” threshold for clients of 2 per cent annually all-in, with platform, discretionary and underlying product costs included.

Isaacs says: “I’m not suggesting clients would be charged more without any provision of any additional service. You rationalise it by providing more value for the money.”

The FCA’s consolidator review in February found that, in some cases, what clients were paying before the buyer had acquired them no longer reflected what they were getting from the new firm. Centralised investment propositions were identified as a potential area of concern, but these can also impact on the asking price for a firm.

There were rumours that Intrinsic paid just £1 for its recent acquisition of Caerus, but senior management at both Old Mutual Wealth and Caerus have rejected this claim.

FCA finds consolidators not considering client needs

One Caerus adviser with knowledge of the terms of the deal said: “There’s quite a bit in the Caerus CIP, so they paid significantly to get that.”

Culture clashes

There are exceptions to every rule, though, and some deals appear to fetch significantly more than the four times recurring income cited by Isaacs.

Money Marketing has seen one approach to an IFA firm offering seven times recurring income for the firm – 3.5 times up-front and another 3.5 times in around five years when the adviser sells the integrated business.

The offer allows the owner to take just the first tranche, allowing the rest of the advice staff to carry on and take the second for themselves; effectively a management buyout.

The approach adds that, even though on two out of 16 occasions recurring income for the seller was less than expected, the payout from the acquirer was not reduced, they would take on all liabilities for past advice, and there was no requirement to hike advice fees from 0.5 per cent to 1 per cent as a condition of sale.

The approach, from a third party, does not list who it is acting on behalf of.

Nexus IFA has acquired at least 20 firms over the last two years. Development director Ian McIver says his common buyout structure would start with a payment of half recurring income in the first year, followed by quarters in the following years.

He says the market is developed enough for advisers to know roughly what they are entitled to – three times recurring – but it is more important to assess a firm’s culture before purchase.

McIver says: “The main thing is about culture. It doesn’t come down to price; people in the market pretty much know what the price is, there’s no beating about the bush, I know I’m going to flog it for three times.

“A lot of them are really ready to step back but they want to make sure the clients are being looked after.”

Sharing in the success

Share options in the new business are another common method of paying advisers for their firm. A lot of these structures can be complicated. For example, a source close to consolidator Succession says the firm has five share classes. A lot of Succession sales operate on six times recurring income, they say, because three times is paid in cash, but another three times can be available based on assumptions about the value of the shares.

McIver recommends advisers take cash payments rather than share options in the new firm as a method of payment for sale.

He says: “Share price is quite poor value. You hold on for shares and it never materialises. Historically, people have never got anything. Typically, they just never seem to come to fruition. If you look at the typical firms that do them its venture capital trust and enterprise investment scheme firms. There’s only one reason they need to do those; at one stage they need to sell and realise the value of the shares themselves. It’s too much of a risk.”

Nexus offers an “annuitisation” option to selling firms, where they can receive an ongoing share of commission and fee income on new business, as well as an ongoing share of trail or renewal income for 10 years after sale.

McIver says by “novating” business to Nexus, advisers can actually receive more like a five to six times recurring valuation, as they are able to take advantage of increases in funds under management over the post-sale period.

In some cases, where an upfront cash payment is made, McIver says consolidators could argue “they get those firms for nothing” because the acquirer benefits from any increase in funds under management when markets rise.

Getting the best deal

So what constitutes a good deal in the end? A source familiar with the deal points to Schroders’ recent acquisition of a “significant” stake in adviser network Best Practice as a model for success on the part of the advice firm.

It is understood the deal was two years in the making, with Best Practice hearing 16 different presentations from companies that pitched to help them through the deal.

Chief executive of Best Practice parent Benchmark Capital Ian Cooke is understood to have kept 49 per cent of the firm, plus another 15 per cent in non-voting shares in the combined company’s profits, the equivalent value which could run into the tens of millions.

Another example cited by an acquisitions consultant was for 3.6 times for a firm with recurring income of £1.2m. The advice firm boss asked for an extra 20 per cent kicker on a three-year buyout deal and it was agreed on the basis of the firm’s uprated value, not just the value at completion, resulting in around a four times recurring income sale value in total.

Schroders takes stake in Best Practice

The easiest deals are usually the smaller ones, Isaacs notes, where say a two- or three-adviser practice is looking at takeover and two may be the business owners. He notes having many people involved in the deal that are not at the front line advising clients can cause issues.

One of the biggest pitfalls of a deal, however, is having buy-in from existing advisers at the firm post-integration.

Isaacs says: “From a buyer’s perspective you have to be careful advisers are onside and wanting the proposition that gets rolled out to clients once the deal gets completed. Deals fail when the buyer forces an agenda on the business that wasn’t discussed before the deal completed.”

This is exactly what happened when Standard Life’s restricted advice arm, 1825, approached independent firm Almary Green, and a number of advisers left because
they did not want to lose their independent status.

A source close to the deal says 1825 steadfastly refused to have any external companies conduct due diligence on the deal, preferring to conduct it all themselves.

They say: “I find it incredible that when a deal is announced half the advisers decided to walk. What was the process in place to bring advisers with you come the deal?

“When you question people they really haven’t thought through the basics. There’s quite a few people who sold and got good prices who are either unhappy in larger businesses, or working for someone else for the first time in 30 years. They are really, really lost.”

Adviser view

Steve Buttercase, financial planner, Verve Investment Planning
Most of the time acquisitions are pretty grubby deals. They want to lock people in. It actually does not change that the fundamental relationship between the adviser and client. We have seen that time and time again with people trying to insert clauses into IFA contracts. The adviser getting away with something approaching value involves a lot of guarantees with future income streams and not a lot of advisers leaving. Gone are the days of three times recurring or five times recurring income depending on the market. They are absolutely right to be worried about haemorrhaging advisers. Acquirers have got to look at different data and really court those advisers and make sure they are looked after.

Scydonia Wealth Markets consulting director Innes Miller says this staff buy-in is also important in larger-scale acquisitions such as Standard Life’s integration with Abderdeen Asset Management.

He says: “As a brand [picking Standard Life Aberdeen as a name], it’s pretty unadventurous, its more about trying to demonstrate to the Aberdeen Asset Management people that this is a merger, not a takeover.”

Keeping clients happy

Isaacs says if advisers or key staff walk, it is likely clients will do the same. This should play on the mind of both the seller and buyer. He says: “If a large buyer is focused on generating assets, then there has to be an acceptance that the assets won’t stay with them if they don’t service the client.”

While there is a risk in some consolidator models that this will happen, Isaacs says they are well aware of the dangers unhappy clients pose to a successful business post-merger.

He says: “There’s a feeling with many businesses that if they sell their firm to a large consolidator that the clients are going to be neglected. I understand and sympathise with that; I can think of examples where private equity changed how they were aligned after the deal completed. That caused advisers to be disenfranchised by the proposition, then advisers leave and clients follow, and the consolidation market doesn’t do as well.

“While that has been true there needs to be an acceptance that most of the market recognises that without servicing clients the assets won’t stick. If the only goal is growing the business to a certain level of assets under management, we are going to get there by providing a strong client proposition that’s going to lock in clients and make them stay long-term.”

Putting a price on the future

As consolidation continues apace, there appears to be a disconnect between the number of willing buyers and potential sellers. One adviser acquisitions broker, Vines Row, appears to have folded recently, according to its Companies House record, but there are still plenty of other middlemen out there actively marketing to IFAs.

This raises the question of whether advice firms will receive higher valuations as the number of eligible firms to purchase decreases.

McIver argues that will not happen though.

He says: “ We have so many acquirers, and the number of sellers is getting smaller, but it won’t happen. There’s always going to be additional acquirers in the market. The trouble is the market is what it is. When we enter our negotiations it’s always been three times. It seems to have been that for ages and I can’t see that changing. The question is it value? How do you define what value is?”

Malcolm Kerr MM blogExpert view

EY senior adviser Malcolm Kerr

Sale price shouldn’t all be about AUM 

I have seen some different approaches other than recurring income. Earnings before interest, tax, depreciation and amortisation is used in large transactions. Then you calibrate that with differences in where the earnings are coming from – new business or ongoing business – but that does tend to be a bit more sophisticated than a multiple of assets under management.

The problem with using AUM is the person with the most influence over that is the adviser, and the adviser does not necessarily get anything out of these transactions and will not necessarily hang around.

One of the problems with this market is there is a large demand, particularly for large firms. Whether they are vertically integrated or not, firms want to grow, and it is a certain size firm with more than a dozen advisers that they are looking for.Therefore the price is going to be bid up a bit.

We hear advisers being offered X by firm A, but those numbers can be rounded up and expectations are pretty high. Always be a bit cautious on how much people do get on day one.



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There are 2 comments at the moment, we would love to hear your opinion too.

  1. In my experience, firms should not assume they are worth a given multiple – be it EBITDA, recurring revenue, or assets under advice. Every deal I have been involved in has been judged on its merits – with regulatory exposure pretty high on the list for most buyers! Nonetheless, I think it is true to say that small 1-2 adviser firms will get lower valuations (all else being equal)s, so should consider merging with other small firms to create something that is more attractive from a buyer’s perspective……albeit this will add a few years to the sale timeline. Sadly, really good, efficient businesses that run passive portfolios also tend to be less attractive and/or attract lower valuations – mainstream buyers tend to be looking for synergies from rationalising operations and (over time) earn additive margin from actively managed in-house portfolios………the less upside they can see, the lower the appetite to buy.

  2. Like everything in life, something is only worth want one is willing to pay for it !

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