3 common misconceptions when selling an IFA business

In this segment of our blog series, we’ll delve into some of the common misconceptions we hear from those looking to sell an IFA business. This is a topic taken from our recent YouTube video “What factors impact IFA Acquisitions?” which is part of a wider collaborative series with prestigious UK law firm Herrington Carmichael.

 

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  1. Valuation

A key misconception that many will experience is the valuation of their business. Gary identified this as ‘The biggest misconception’ that vendors have. Although vendors are aware that the multiple usually ranges between three and four times; everybody gets precious about their own client bank being more special than somebody else’s. Therefore, there can be a misconception that some feel their business is going to be worth four times or over. What we need to do, is be objective and remember the factors that value clients worth to an acquirer. The average value of investment holdings per household will be the first factor, where the higher net worth the clients are this will push up the multiples. For example, clients holdings under £200k are not going to have as high of multiple as clients that are £300k or indeed £500k+. This is because there are less client reviews required which means improved cost effectiveness of resource needs. He added “The next area will be the age of clients”. Most acquirers prefer clients to be in their 50’s and 60’s which will give them lots of longevity of client ownership. However, the age of clients is often similar to the age of the adviser or even 5 years older. So, if somebody is retiring at 65 – don’t be surprised if the average client age is 65 – 70. Most Acquirers prefer to be buying a retiring IFA client bank as opposed to an Adviser in their 40’s or 50’s because there is less fear that the IFA will return to advising at some point in the future. Hence, there has to be an understanding of likely client age profile. ONS provides some useful stats showing that people aged 65 years in the UK in 2020 can expect to live on average a further 19.7 years for males and 22.0 years for females. It is also a known fact that wealthier clients are likely to live longer than these averages for all population. We would argue that clients at aged above 75 / 80 still have a value, however a seller does need to appreciate that an Acquirer will want to adjust the value based on average longevity of clients vis-à-vis the return on investment. That’s where this misconception about ‘my client bank is going to be worth four times’ may be wrong.”

This is not to say that you won’t be able to demand 4 times for your business or client bank, but this multiple is usually only reserved for the very best businesses.

  1. Processes

Wanting to keep all the same processes post sale. Gary added “Another misconception would be that a seller doesn’t want any change whatsoever with the processes during the deferred buyout period. That’s rarely going to happen. What we would do as a broker is try to align the buyer and the seller so there’s as few changes as possible, certainly in the first couple of year whilst the Acquirer / New Adviser builds trust whilst building a relationship. With this being said there will inevitably be some changes, it’s a bit like when somebody is buying and selling a house. You’re not going to buy that house and live in it exactly as you bought it – there will be some minor changes. Of course, the difference is if somebody’s going to knock it down and rebuild it! I think having an open dialogue here is really important, and this is where brokers can help because we can be very informative about what is likely to happen from knowing the Acquirer’s acquisition model and give some solid advice, which is key.”

Alex Canham, also sees this from a legal perspective and said “In terms of one of the challenges we see later in the process, where people don’t want anything to change and is saying ‘In the contract, I’d like certain things restricted and protected and locked down to a very high level of detail.’ Where we’re working with sellers the challenge is to manage that and say firstly, buyers are just not going to agree to it. But also, it does need to be managed to give them a degree of flexibility to go and work with those clients going forwards.”

 

  1. Timeline

Finally, the timeline of an IFA Acquisition can surprise everyone involved in the deal whether that be buyers, sellers or third parties. This is one that we constantly try and prepare our clients for as this can massively vary from deal to deal. In an ideal situation, from when sellers first engage with a broker to completion, this could be undertaken in a matter of months. In reality, this can take over a year from start to completion with many bumps and blocks in the road that we have to overcome.

This is why we always encourage sellers to engage with us for a free confidential chat about their plans in advance so that we are able to properly plan and select the best option for them. We will be talking more about the importance and benefits of retirement planning in upcoming content so keep your eyes peeled!

Conclusion

Today’s blog gave a handful of misconceptions we often hear as a broker as well as the team over Herrington Carmichael. To recap the 3 points, we made today:

  1. Valuation = Don’t expect a flat 4x recurring income
  2. Processes = You can’t expect to keep all the same processes post sale
  3. Timeline = Set expectations when deciding to sell your IFA Business

Contact us to discuss this further:

Herrington Carmichael disclaimer

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.

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