View more on these topics

By the buy

What consolidators are looking for in IFA businesses

Damian Keeling
Damian Keeling

If we are to believe recent industry soundings taken among IFAs, then there would seem to be a significant group of firm owners looking for an exit strategy prior to the RDR. This has led to conjecture about the future size and strength of the industry, how it can meet the financial advice needs of the public and the growing levels of con-solidation likely before 2012.

Firms may be looking at how to prepare and show themselves to potential buyers. First, there is no universal process to being purchased, every firm is different, as is every purchaser.

For instance, Perspective as a consolidator tends not to buy firms where the management want an immediate exit from the business. We view the acquisition as a two-way agreement where both parties work together to drive future growth and profitability. We will have bought the firm because it is already profitable and we want to keep the management in place to continue its success backed by the support mechanisms we are able to deliver.

For us, a key measure and indicator for whether we buy a business is its profitability, which can mean different things to different people.

We do not view a business as being profitable if it only really makes enough money to pay its partners or directors a decent living wage.

The target profitability of a firm should be enough to reward the owner in their capacity as shareholder or partner/sole trader, as well as a return for them by way of their salary. Overall, we would look for a firm to be making around 25 per cent net profit margin on its turnover after paying those who produce the most income, including the partners/directors.

How the business generates this profit will come down to a number of methods but we tend to look for firms which have income strategies based on a recurring or trail income model rather than where the only focus is initial income.

We do not suggest that firms neglect initial income, rather that they have a good mix of both initial and renewal. Firms neglecting initial income will create a mismatch between income and expenditure and, in all likelihood, will be unable to fulfil their growth and profitability prospects.

There are no hard and fast rules for the mix but the balance we would generally look for would be between the 40/60 to 60/40 range.

Owners serious about planning for an exit need to make sure their business is in the best possible shape to attract buyers. This may well take considerable time and effort but it will be necessary to meet their ambitions.

Damian Keeling is managing director of Perspective Financial Group

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment