Stephen Hagues, managing director of business brokers Retiring IFA, assesses whether now is the time to sell your firm.
Quality clients with funds to put under management are the lifeblood of any front-end financial services business. The prospect of many IFAs exiting the industry and leaving their client bases up for grabs has prompted a gold rush of other IFAs, product providers and fund managers among others, lining up to acquire the available funds under management.
However, the reality is very few IFAs are selling at the moment. Those with low recurring income or who are still working a transactional model have very little trail to sell. The bottom line for these people is it is simply not worth selling the business for less than the income that could be generated by staying on for 18 months. While the ones with large trail incomes are seeing that income rise due to the stock market bull run.
In addition, the possibilities of grandfathering and other grey areas of the RDR seem to offer at least faint glimmers of hope that something may possibly change, so enabling non-level-4 qualified business owners to continue in some form.
Newton showed that an object at rest remains at rest unless acted on by an outside force. Human behaviour, being based on habit, dictates that the path of least resistance for IFAs (as with everyone) is to stay where they are until forced to do something new.
It stands to reason that the IFA population is thoroughly examining what the outside force of the RDR will be before they launch into the upheaval and uncertainty of retiring or changing their livelihood on a whim.
The current situation in raw figures in the market is that buyers outnumber sellers by about ten to one.
If we dismiss those potential purchasers without capital or the ability to raise it, and those who would like to think about it but are not serious prospects, then the number falls to less than half that.
Over the years, we have developed our own fact find system which grades buyers in key areas such as affordability, price expectations, business growth and track record. By using this technique, we are left with effective, genuine purchasers outnumbering sellers by about two to one.
As all IFAs know, predicting markets can be a difficult art and is best avoided. Nevertheless, everybody wants to buy at the bottom of the market and sell at the top.
The IFA mergers and acquisitions market, like all others is driven by supply and demand. In terms of demand drivers, it is becoming a widely-held view that the charging transparency needed to operate within a post-RDR environment could mean that less clients will be happy to pay for advice. Alternatives for consumers are readily available with many discount internet sites growing rapidly and taking market share.
With more clients and more funds needed what are the alternatives to acquisition?
Professionally introduced business is a well-worn path with lots of IFAs chasing a reducing flow of opportunities. Websites, sponsorship, advertising and all other marketing communications channels are intangible and costly.
Compared to an orderly transition of the goodwill, relationships, databases and funds under management of an acquisition, there is no real comparison. I would go so far as to say that with the ongoing blessing of a retiring principal there is no more effective way to grow your business than the right client bank acquisition.
In terms of supply drivers, there is a large proportion of principals with an average age approaching 60, who have reached their planned retirement age. In addition to this number, there are many prompted exits being driven by qualification and business process changes associated with the RDR.
It is fair to say that more businesses will come on to the market in the run-up to January 2013. These client books will be typified by having little or no recurring income and they will also be perceived as having been exhausted of new business opportunities. They will likely be valued accordingly.
So with high supply and high demand I do not believe there will be a significant shift in prices across the market. In any case, sensible business people understand that the value of any product lies in what it can do for them rather than what someone else might pay for a similar business in another part of the country.
Those waiting to take advantage of desperate retiring principals will miss the boat. Why would anyone sell for a rock bottom price when they can do a commission split with a friend in the industry or hire an authorised paraplanner enabling them to move to being a figurehead in the firm?
If an acquisition pays for itself in under three or four years, then it is a very good deal. Those who have shown skill and prowess by bolting on client banks have been able to quickly digest them and move on to the next one - stronger and cash richer than before.
Most importantly, they should also have a glowing reference from a happily retired IFA that the deal went smoothly, as this gives them a significant competitive advantage in attracting the next seller.
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