Business values for multi-adviser firms are experiencing a steady rise, defying challenges posed by high inflation and increased capital costs, as consolidation race heats up, according to a recent report by Gunner & Co., the leading M&A advisers in the UK.
Based on a comprehensive analysis of five years of deal data, it is evident that competition and demand for larger firms are on an upward trajectory, with average multiples of EBITDA (a profit measure used for bigger and more complex deals) reaching an impressive 8.3X in the first half of 2023, up from 8X in 2022. Notably, EBITDA multiples have consistently grown year over year, escalating from an average of 5.9X in 2019.
The M&A market experienced a notable shift in 2020 as a new breed of buyer emerged, targeting multi-adviser firms and driving expansion by acquiring regional smaller retiring IFAs. This strategic approach empowers business owners to sell their firms while retaining leadership to spearhead future growth.
Louise Jeffreys, Managing Director of Gunner & Co., commented, “The influx of buyers, predominantly supported by private equity houses, seeking opportunities in this category has led to robust demand and increased values, creating a favourable environment for sellers.”
Despite the surge in demand for multi-adviser firms, Gunner & Co.‘s insightful deal analysis paints a contrasting picture for smaller retirement-led sales, which are typically valued on a multiple of recurring income. Whilst all firms have been impacted by market volatility and inflationary pressures, this market segment has felt the pinch profoundly, with sellers in this category often being smaller, owner-managed firms which lack the robust infrastructure to offset market disruption.
Recurring income valuations peaked in 2022, reaching an average multiple of 4X. However, a detailed analysis throughout 2023 indicates a cooling off of these valuations, with the average currently resting at 3.5X for the first half of the year.
Reflecting on the data, Jeffreys noted, “Valuations for smaller, retiree businesses have consistently averaged around 3.5X recurring income since 2019. It is not surprising to witness the figures returning to this range. The market for these smaller firms has become increasingly challenging, with a growing number of buyers seeking bigger deals that significantly impact their portfolios.”
As the “buy & build” businesses increasingly compete over the same target acquisitions, it is speculated that a wave of buyer mergers may occur due to the challenge faced in achieving their scale objectives. Such a trend may lead to a decrease in demand, exerting additional pressure on prices.
As the M&A landscape evolves, multi-adviser firms continue to be a lucrative option for those seeking robust growth opportunities, while smaller businesses must navigate a more challenging environment amidst fluctuating valuations, a tough regulatory environment and escalating demand from buyers.
Gunner & Co. are IFA and financial planning M&A advisers, advising and brokering transactions since 2014.