2015 – Your View on Future Valuations
So 2015 is gearing up to be a hectic market place with sunset clause looming, capital adequacy laws destined to change and the ratchet up of FCA fees. Network members are also witnessing pressure in the form of increased expectation regarding revenue and internal buy out mechanisms being squeezed. I personally believe these variables will impact the landscape more than RDR in terms of businesses coming to market.
As a commercial sales specialist I find this movement fascinating. Commercially, RDR impact has ensured the quality of firms coming to market are of a greater level. However with more business owners looking to make a change this will no doubt benefit the acquirer as we will see more choice of these better businesses, hence the premiums could well be lowered.
I would like to hear your thoughts on valuations in 2015. Do you believe they will stabilise; increase; reduce and what are your views on valuation metrics? Is this the year we will see profit; EBITDA taken into account on a more wholesale basis rather than the legacy standard – a multiple of recurring income?
A final thought. The FCA and Government are clearly working successfully in strangulating elements of our industry. How this impacts the future of the regulated financial industry is a piece I will save for another day.
Jonathan is the Regional Director for the South.
My experience has been that buyers of IFA practices are generally looking for a business that have an average investment fee income based of 0.5% or less of AUM which they plan to change to 1% shortly after purchase. They offer typically 2 times maybe 3 times this revenue but in reality hope to have only have paid half of this figure when they have converted the client bank to 1%.
This profiteering at the expense of the seller where very little is really paid for the client bank seems to prohibit buyers paying an equitable price for IFA’s where the business is efficient, profitable and in our case based on a very well established client bank generating nearly all revenue from asset based fee income i.e. we are not dependent on constantly finding new clients.
Where a client bank is already paying 1% adviser fees we find there is a lack of interest in paying even 2 or 3 times renewals. Combine this with an inability for buyers to pay up front or buy the shares in the company owning the client bank means that the final offer is often derisory and weighted too much in favour of the buyer, not the seller who end up with a tax inefficient sale which might often not be worth more than a year or so’s worth of income.
Buying as a multiple of EBITDA seems more sensible but buyers still need to improve their terms i.e. pay more upfront rather than try and pay a large portion of the fee out of the client bank’s income, pay a fair multiple of EBITDA, and buy the shares of the business rather than stripping out the clients.
My hope is that in the not too distant future the very much lower risks of an evidence based adviser practice where there should be only simple low cost highly diversified portfolios and content long term clients, will be sold at a premium rather than being shunned because the buyer cannot quickly leverage up the income to make a quick buck. I wonder if the current state of affairs persists whether more IFA’s will look to pass the business onto their children as the long term value is clearly worth a lot more than the market seems to want to offer.