Consolidation is the big buzz word of the industry, with firms buying up businesses from retiring advisers or those who simply wanted an exit strategy.
Prior to the coronavirus outbreak, there was at least a deal a week completed in the financial advice sector, however news around acquisitions has nearly dried up.
But Jonathan Barrow, director of acquisitions at M&A consultancy firm City & Capital, said that the pandemic has not “fundamentally changed the make-up” of the financial advice acquisition market.
Business as usual
“We are still seeing sellers selling,” Barrow said. “We are still seeing buyers buying. The buying market has however shrunk slightly.
“We have seen some firms who are less risk-averse, pausing their acquisition activity until the full extent of the covid-19 pandemic has been fully understood.
“The remaining acquisitive firms are seeing this as an opportunity to secure additional assets while the competition is reduced, as they understand the longer-term benefits of acquiring are still there.
“Due to social-distancing requirements, we are seeing video-conferencing facilities being used in place of face-to-face meetings between buyer and seller.
“From there, all due diligence and legal-documentation is being carried out online via secure data rooms. It has been encouraging to see the industry respond in such a flexible and entrepreneurial way.”
Reaction
The modern world has not experienced a pandemic of this proportion before, with the Spanish flu of 1918-1920 the comparison most often made.
But the world is a very different place.
With the situation evolving daily at the start of lockdown, financial advice firms had to act on the little information the UK government had at the time.
Barrow said that there was an initial period of pause on both the buy and the sell side when covid-19 first set in.
“We are now seeing more comfort in deals proceeding, naturally with slight alterations to the purchase mechanisms,” he added. “Due to a decrease in the markets, the immediate values of wealth management firms have dropped.
“We are now seeing ‘open-sided’ terms being agreed where the acquirer will adjust the future payments due to the vendor, if the income received from the purchased clients are greater than the figure agreed when contracts were signed.
“In summary, there are still a significant number of excellent buying opportunities, as well as some high-quality acquirers in the market. However, a handful have paused their acquisition activity until the future impact of covid-19 has been demonstrated.”
Regulatory problems
If deals continue to be made, could there be a regulatory backlog at the Financial Conduct Authority?
The FCA said it is not carrying out non-urgent work at this time. But it did not say if processing M&A deals were urgent or non-urgent.
The likelihood is that the FCA will want deals to take place without problems, so then it has fewer firms to deal with in its regulatory oversight.
Barrow said: “As with any business, operational resource has to be deployed to the most pressing areas.
“Whilst additional regulatory focus is currently being placed on the eradication of phoenixing, change of control applications continue to be being processed in a timely manner.
“While this could be subject to change, our advice remains to fully acquaint yourself with the FCA processes well in advance, whilst ensuring all documentation being submitted is complete and accurate.
“Ultimately there will be a decrease in advice deals being completed until the impact of covid-19 is fully understood. This means there will be less change of control applications being sent to FCA in the coming months, which should assist the regulator in managing workloads.”
Complications
Once a deal is authorised by the FCA, there are still some issues to take care of during this unprecedented time.
In particular, Barrow flagged that, once a deal has been agreed and contracts have been exchanged, how are clients being informed to ensure they have full confidence in the acquiring firm to manage their assets moving forward?
“Pre-covid-19, this was done via face-to-face meetings with the new adviser in tandem with the exiting adviser,” he added. “With social-distancing dictating that face-to-face meetings cannot occur for the foreseeable future; innovation will be required to overcome this hurdle.
“This could prove to be the most complex hurdle.”
Future of the market
When this pandemic is over and life starts to go back to some sense of normal, will the M&A market be the same?
“There is no hiding from the fact there will be an impact on the M&A market once we have got to grips with this pandemic,” said Barrow. “Independent buyers have taken a financial hit and they will need to think carefully about how to increase the coffers if they are to be involved in M&A activity post-covid-19.
“Some vendors may have budgeted their retirement around a specific financial figure, determined by the sale price of their business.
“As such, they may decide to defer their retirement until they have reached financial parity.”
Positivity
But Barrow did mention that some M&A practices may change for the better.
He said that “the industry has been forced into harnessing technology for good”, and that video conferencing has replaced “time-consuming” face-to-face meetings, which is “aiding the efficiency of the initial ‘courting’ process”.
“Vendors are also now able to demonstrate the same market confidence they have always asked of their clients; the markets will pick up, that much we do know,” he added.
“Therefore, we are finding vendors are willing to agree a lower financial consideration now, safe in the knowledge that their future payments will increase in line with the inevitable market surge.”
Words of wisdom
Barrow also gave some advice to both buyers and sellers in the financial advice market.
“If you are a vendor and have an exit strategy in mind, then have the confidence to know there are still a substantial number of options out there for you,” he said. “If you are hoping to exit in the coming months or years, then use this time as a period of consolidation to ensure your business is in good shape.
“Pre-empt the impending due diligence requirements by ensuring your reporting system is robust, demonstrable and streamlined.
“If you are an acquirer hoping to purchase a business, use this period to polish your business and get your house in order.
“What is your USP? How streamlined are your onboarding processes? How can you make your business stand out from the crowd?
“Use this time wisely. Markets will inevitably increase. M&A activity will inevitably increase. This is all part of the journey.”
