Before you can think about retirement, you first need to get a good understanding of how the acquisitions process works. A good first step is to understand how to value your own IFA business and how Acquirers are likely to assess what your business is worth to them.
In this blog, we will aim to inform you on how to navigate through the myriad of factors that affect the valuation so that you can define a fair price for your IFA business.
The importance of valuing an IFA business
Firstly, why is correctly valuing an IFA business so important? Well, getting the valuation of your IFA right is so important for several different reasons…
- Planning for your retirement – It will be near impossible without knowing a rough estimate of the funds you will have available to you. Without knowing if this is going to provide you with a fair value, who knows how often you’ll be down the golf course!
- Knowing timings – Following on from the last point, many will structure their exit timeline around the number they receive. For example, a firm may not be ready to sell now but in two years they will have grown to a point where it is now suitable and sustainable for them to hand over to an acquirer.
- You open yourselves up to the right people – A key part of any exit is finding a fair and just buyer with who you will be able to grow a strong working relationship and they have a client centric proposition to maximise retention, knowing they will provide a valuation that is likely to be close to what you end up being paid.
Different ways of valuing an IFA business
IFA magazine recently detailed in an interview that the two main ways of determining a business worth are through a multiple of recurring income or a profit-based multiple (EBITDA). These are also the most common methods we see here at IFA Acquisitions, let’s have a quick refresh on these methods…
- Recurring Income = The amount of recurring or ongoing income your business generates per annum.
- Typically, anything between 3 to 4 times this number is an industry-standard in what you can expect as a capital event when handing over. However, in the current industry climate with the larger consolidators, we’ve been seeing some multiples of 4x – 5x! The additional premium above 4x can often be attributed to giving extra towards the additional corporation tax that will be payable on asset purchases.
- EBITDA = Earnings before interest, taxes, depreciation, and amortization. Essentially EBITDA is an adjusted profit metric.
- The average offering by those acquiring firms using EBITDA is a bit vaguer and it is worth noting each acquiring business will be different depending on their circumstance and size. Although EBITDA does have its critics, it is still one of the industry standards. It is mainly used by any business that wants to take on a going concern with advisers and support staff that will remain in the business post sale. An EBITDA calculation helps make sense of what profit the acquirer is buying when the acquirer is taking on cost. Often multiples of up to 6 times is seen for SME;s and can extend to 8 to 9 times for larger businesses with £500m FuM or more.
Here at IFA Acquisitions, we have carefully cultivated a number of nationwide acquirers with various preferences on acquisition types.
Furthermore, the FT advisor released a blog in which Scott Gallacher, Chartered Financial Planner at Rowley Turton gave another explanation, he said “IFA businesses tend to be valued [based] on one of three ways. [These include] a multiple of ongoing advice charges, a multiple of profit or as a percentage of Assets Under Advice.” To break down Scotts examples.
- Multiple of ongoing advice charges – This is the same as recurring income and is the industry standard for most deals.
- Multiple of profit – This is the same as EBITDA and is usually used by larger businesses
- Percentage of Assets Under Advice (AuA) – This is an uncommon method usually used by larger Wealth Management businesses who have their own DFM and will be reaping the lion share of the TER, rather than just from advice fees.
Some acquirers will offer all options and others will be set on one so being aware of all types is very important. It is worth deciding your preference on which method of sale you would have a preference towards, although for sole or dual adviser firms the model most likely to be used will be a multiple of recurring income.
Alongside this, other things to consider that will indirectly impact your IFA acquisition, include…
- The average age of your clients
- Percentage of clients aged over 75 / 80
- Are clients intergenerational where you have the next generation that will inherit wealth
- Your geographical business location and area of coverage for meeting clients
- Average holdings per client household
- Your investment proposition(s) and whether these are portable platform based
- Is it just you or do multiple people have equity? – Do they share your same exit goals and timescale?
- Are clients in accumulation or decumulation?
- Percentage of ongoing Adviser fee charging and whether there is any uplift potential
- How much is the business brand ‘worth’?
- Your personal exit timescale / timeline
- DB transfers / other high-risk areas of investment
- Method of sale – share or asset purchase?
- How much recurring income is from pre-RDR trail
Going forward, we will be posting more frequently on the IFA Acquisitions blog and YouTube channel regarding all of these topics. So, make sure you follow us on all of our relevant channels such as our LinkedIn and YouTube.
Tips for you
Every IFA Acquisition is and should be unique, for most it is a once in a lifetime event and the culmination of a career’s worth of work. Here are some tips to make sure you are getting the fairest valuation of your business and hard work.
- Decide what you want – Hopefully, you are happy with your valuation, but if not don’t worry! There is no set time on retirement. You can sometimes wait and grow your business to a point you are happy with before retiring, however don’t leave it too long as it can be counter productive
- Feel out the market – It may be worth checking out similar businesses to yourself to see what kind of things they are saying and what kind of prices they are demanding – a good broker will help you with this.
- Shout about your USPs – What makes your business stand out? Why would an acquirer want to purchase your business? Examples are: if you are a well-established company, say over 30 years, chartered, or having strong professional referral partners – how could you put a price on brand equity?
- Use professionals that you can trust – the last thing you will want to do is having your business details commonly known as being up for sale. Clients might start looking around for a new adviser. Use a broker that discusses options with you without having to send your details to multiple buyers and make sure they have NDAs in place when your details do get sent.
To conclude, valuing an IFA business can be the first formal step in the retirement / exit process and for that reason, it can be a very difficult time for many. It can often be an emotional process as many struggle with the fact that their years of hard work and sacrifice has been put into a tangible number. However, it is a very exciting time for many people and allows them to look forward to a long and happy retirement, plus knowing that their clients will be well looked after for many years to come.
For more information, contact our team on 0208 0044 162 or [email protected]