2022 has already seen some tumultuous times for the UK and world economy and the start of Q4 has seen no abatement. Liz Truss recently resigned as Prime Minster. During her 44 days in office the markets reacted negatively to her fiscal plans where tax cuts were unfunded causing the value of the pound to tumble and economic uncertainty to rise. Mortgage rates hit fresh 14-year highs as the Bank of England needed to stabilise the pound. The knock on effect of this has seen a reduction in the value of investments in gilts and also with the drop in the FTSE 100 from 7,300.44 on the 6th September when Liz Truss became Prime Minister to a low of 6,850.27 on the 13th October before appointing Jeremy Hunt as Chancellor to reverse fiscal changes.
FTSE 100 Index
What this has meant for IFAs is that the value of FuM has dropped significantly having already experienced previous falls following Russia’s war with Ukraine where the FTSE was 7,661 on the 11th February 2022 prior to its first invasion and the Dow Jones was 34,738.06 on the same date but had dropped to 30,038.72 by 13th October. During this period markets wiped billions of pounds off the value of equities as the FTSE fell by 10.6% and the Dow fell by 13.1%.
Dow Jones Industrial Average
With all the news circulating currently as the western world heads for a recession, it could be seen as a poor time to sell your IFA business, and we wouldn’t blame you for thinking this!
However, at IFA Acquisitions we remain optimistic about valuations. Generally, calculations are based over a 12 month period which will provide pound cost averaging. The market has seen increasing multiples being offered by Acquirers which counteracts a drop in recurring income.
Markets are hoping that the appointment of Rishi Sunak as the next UK Prime Minister on 25th October with tighter fiscal policies will help draw a line under the events of recent weeks which is likely to avoid further interest hikes by the Bank of England and we are already seeing lenders reducing their 2 year interest rates from earlier peaks. The markets are expected to continue to see further fluctuations as governments grapples with inflationary pressures through interest rate policies, austerity measures with cutting public spending, and tax changes; however it could mean that world markets has now priced in a full recession, but uncertainty around inflation and interest rates might break the pattern.
1. Consolidators entering the market
The continuous level of private equity in and around the financial services market is having a huge impact on the demand, subsequently driving up consideration values whilst simultaneously pushing through more deals. For sellers, this is great news as they can roughly expect multiples up to 0.5x – 1x higher than 18 – 24 months ago – for the same business! This is due to the huge level of competition currently in the industry where it is not uncommon to see more than one acquirer at a time vying for a business.
This is also good news for buyers, although consideration values have crept up over the last 18 – 24 months, we believe they will continue to hold at these new levels in the coming years regardless of any outside influences. There is uplift potential for acquirers where obligations under Consumer Duty justifies increases in adviser fees and where firms have discretionary mandates are able to absorb a greater share of TERs. This is why we believe it is a great time to sell now, because the market will continue to hike upward consideration values!
2. Our pipeline is the strongest it has been
On a daily basis, we are speaking with ambitious acquirers looking to scale up their businesses by injecting acquisitions into them, seeing the current climate as a perfect buying opportunity.
Conversely, lots of sellers are seeing the current climate and ever increasing regulatory needs as a good time to retire and are subsequently looking to wind down their involvement in their business. Sellers also have the awareness that they can expect the 3.5x to 4.5x industry-standard multiples they have heard about. Multiples that 18 – 24 months ago were aspirational!
One common theme we’re seeing whether speaking to buyers or acquirers is the current affairs of the country impacting their decision, demonstrating the uncertain nature of things right now. What we can say on this is that we are continuously seeing our highest performing months as a business due to the host of fantastic sellers and buyers we are speaking to on a daily basis.
3. Turmoil passes
Finally, all turmoil eventually passes, at the time of writing, the new leadership race has just been decided which should ease domestic tensions at least economically in the short to medium term.
By waiting to take action, you are only pushing back your growth or retirement date. We can say this with confidence using this graph from TheGlobalEconomy.com:
This is because perceived political turmoil rises and falls depending on various key indicators such as:
- GDP and economic growth
- Business cycle indicators
- Consumption and investment
- Money
- Labour market
- International trade and investment
- Government
- Forecast from the IMF
- Governance and business environment
- Infrastructure and transport characteristics
- Energy and environment
- Industry: Oil, coal, and electricity
- Energy mix
- Agriculture sector
- Banking system access and depth
- And more
Key takeaways
In summary, we believe now is a great time to engage in the IFA Acquisitions market due to the following reasons:
- Consolidators entering the market has buoyed deals from all acquirers
- Our pipeline is the strongest it has been with record consideration values
- Turmoil passes and clients want ongoing advice evermore during times of uncertainty
Contact us now to discuss the valuation of your business:
By: Gary Venner, CEO of IFA Acquisitions
Email: [email protected]
Telephone: 0208 0044 154