Nearly three-quarters (72%) of IFAs in the UK believe that they are undervalued by potential acquirers, according to M&A broker HSP Consulting.
The firm’s survey found that experienced advisory firms have raised concerns about the fairness of business acquisitions based solely on an adviser’s fund-based renewals, which they have diligently cultivated over the years.
Brian Spence, chief executive of HSP Consulting, said: “This perception of undervaluation could impede the sale of many IFA businesses.
“To secure their financial futures, retiring IFAs must proactively seek opportunities that align with the true worth of their businesses and not settle for less than they deserve.”
Instalments
Traditionally, the industry standard for stage payments has been an initial 50%, followed by residual payments spread over 24 months.
However, the HSP survey results indicate a growing number of IFAs view 75% as a more appropriate figure.
Spence added: “Selling IFAs have long felt that they disproportionately shoulder the risk in the sale process.
“Embracing this change in stage payments can foster a fairer and more balanced transaction environment.”
Also, 16% of IFAs expressed interest in securing an additional bonus in the form of a shareholding in the acquiring company.
“This alternative compensation structure could lead to more significant rewards in the future, especially if the acquirer enters the market or undergoes an IPO,” Spence said. “By embracing this option, IFAs can enhance their financial prospects and align their interests with the long-term success of the acquiring firm.”
Navigating valuation challenges
The survey highlights that 40% of IFAs face uncertainty when valuing their businesses beyond traditional multiples or Ebitda.
HSP’s Spence added: “Valuation is a complex process that requires expertise and a comprehensive understanding of market dynamics.
“To ensure IFAs secure the maximum value for their businesses during the acquisition process, seeking professional advice is paramount.”
Consolidator-based businesses face mounting pressure to grow and expand in a shrinking pool of IFA firms.
The survey underscores the opportunities for growth by considering an adjusted approach of 3.3 to 4.5 times the multiple (dependent on the individual opportunity), with 75% paid upfront and the residual after 12 months, plus shareholding in the acquiring firm where appropriate.
HSP said that if IFAs intend to stay on board for several years after the sale, the formula will look different, highlighting the need for tailored strategies.
Call for action
Spence said: “Now is the time for IFAs to take charge of their futures. For IFA buyers, embracing innovation and exploring alternative options is key to attracting desirable businesses in this competitive market.
“For IFA sellers, professional advice can be a game-changer in securing the best offers and navigating the intricacies of valuation. Act now to unlock hidden opportunities and pave the way for a prosperous future for both parties.
“With 72% of IFAs feeling undervalued and the industry shifting towards higher first payments and alternative compensation structures, it’s evident that the landscape is evolving rapidly.
“To thrive in this fiercely competitive market, both IFA buyers and sellers must be bold and innovative, seize the opportunities before them, and seek expert advice to pave the way for a prosperous future for both parties.”
Louise Jeffreys, managing director of Gunner & Co, added: “Valuing a business is part art, part science. Factors including the supply and demand curve at any given time, the strategic and commercial objectives of a buyer and the strength of motivation to sell all have significant influence in each individual case. It is very hard to understand any of the science behind the position uncovered by this survey.
“That the majority of IFAs would like to be paid more is hardly surprising. However when you look at valuations in this sector in general, you will see that valuations are typically considered comparatively high, particularly when you consider other private clients service businesses such as solicitors and accountants where valuations can be as much as two thirds lower.
“Business valuations across the board are dictated by the rate of return on a given investment. Buyers will use complex models to understand how they can make the best possible priced offer, with the minimum risk of a failed return. They will pick between opportunities, considering cultural fit, to establish the best investment all around. It is not as simple as suggesting these businesses should be valued higher, without commercial evidence as to why.”
