In this week’s blog, Alex Canham Partner at Herrington Carmichael asked Gary about the trends in IFA valuations. A topic taken from our YouTube video “Top tips when acquiring an IFA Business” which is part of a wider collaborative series with prestigious UK law firm Herrington Carmichael.
“So Gary, working with buyers and sellers it’d be useful to know what trends you’re seeing in terms of valuations and what sort of typical multiples you’re seeing in transactions at the moment?”
“Yeah sure Alex, well there’s definitely an upward trend in valuations certainly that’s happened over the last few years. If I go back sort of five years ago we were looking at multiples of 3 ¼ as being superb, but we’ve seen much more three to four is our barometer. The last 12 months to 18 months those rates have gone up as much as 4 ½ to 5 times. That’s mostly down to consolidators in the market, certainly when they raise private equity or debt finance they do need to spend that. It is pushing the market upwards. We’re seeing some of those multiples have increased partly because of trying to compensate on an asset purchase, so it’s giving compensation for corporation tax that may be paid as well EBITDA calculations. Again, we’re seeing a wide range at the moment but you do have to look at the metrics in how that’s been valued. You have to make sure it’s not apples and pears here whether it’s the EBITDA on the original business or whether it’s a normalised EBITDA post-sale with all the various economies of scale etc. Again, different businesses for consolidators. In particular those that want to actually acquire hubs, certainly for the larger size of £500 million of funds under management or more then these are very attractive so it’s pushing the multiples up. EBITDA is typically I would say between 5 to 7 but we are seeing 7 to 9 in some instances. You just have got to be careful how you look at the metrics of the valuation.”
Alex responded with “That’s great, and I think certainly from a transaction point of view. What we’re seeing as well that’s coming through on the transactions that are starting, because we’re slightly further back in the chain than you guys when you’re seeing the deals at inception, so it’s interesting to see that those trends are continuing through this year.”
“So my next question: What are your top tips to sellers for sellers? Think getting your house in order before you sell”
“It is key [getting your house in order] and that can cover a range of things. I appreciate everybody’s got the day job to do so saying ‘hey I’m going to take two weeks out to prepare for sale’ isn’t viable. What you can do though, is talk to your existing network and Advisors ultimately whether that’s your Compliance Consultants, your Accountants, your Lawyers. Getting a sort of a pre-sale pack together is helpful. It sounds very grand but actually it’s just being able to lay your hands on basic information. Making sure that your accounts and management information, all of that interim monthly data is available, making sure that any key contracts and things with key Advisors or staff are signed and enforceable. There’s nothing worse than when you’re looking at a business and you see a key Advisor who looks after a large proportion of the recurring revenue has not signed a contract. Little things like that that seem obvious but actually, can make all the difference. I think they should go through and do that sort of process over a period of time. It can be done at any stage. It’s good business housekeeping anyway let alone if you’re going through a sale process so if there is the opportunity to do that I’d certainly recommend they do.”