National financial advisory and discretionary fund management firm The Beaufort Group has teamed up with corporate finance firm Asgard Partners and accountancy firm Taylorcocks to compile an independent report on current valuation methodologies for UK IFA businesses.
The research analysed an extensive set of M&A data points to arrive at trends in valuation, overlaid with the views of leading practitioners.
Looking at four principle metrics used for valuation methodologies – recurring income, EBITDA, total turnover and AUM – the report delves into the ranges within valuations, as well as some of the underlying qualitative conclusions which underpin the highs and lows of these ranges.
At a high level, the report calls out the following key verdicts:
- profit is considered a more important basis of valuation than recurring income;
- tempting, but highly conditional offers may well leave vendors disappointed in the end;
- limiting risk remains a key concern for acquirers;
- a strong brand catapults valuation, over and above a collection of individual advisers
Furthermore, in setting appropriate multiples, some acquirers will factor in revenue and cost synergies over and above the intrinsic value of the business. The report considers that high recurring revenue multiples remain possible, but only when:
- there is a likelihood that client fees can be increased or funds moved to an in-house proposition;
- an acquirer can realise substantial cost synergies, for example where premises can be closed, or the number of staff reduced.
Diving deeper into the key metrics, the research has identified ranges of valuation within a given metric, and sets out how a business will attract a premium multiple.
The report describes an expectation there has been, of a 2-4x recurring range. The report describes a belief that most recurring revenue valuations are reducing, with a move to an earnings basis for valuation. The belief is that recurring valuations actually achieved are now moving within a lower range. If a higher range is sought,this is typically predicated on moving a pre-RDR 0.5% trail to newer charging models at up to 1% p.a.
They state that this recurring revenue methodology best suits businesses of retiring individual IFAs, where the difference between turnover and profit is less, and the adviser will not be remaining on, removing the conflict of changing the business operations.
Typically this recurring income valuation is calculated as an average of income over the deferred payment period, which can lead to problems:
- if there is leakage on transfer, e.g. clients prefer to take their business elsewhere if they dislike the acquirers methodology;
- recurring income offers may be predicated on the successful transfer of clients to an acquirers investment process;
- acquirers may not pay cash – some offers may even be 100% in shares with uncertain value.
The research finds that profit-related valuations are usual for most large M&A transactions. Value can be attributed to existing profits, rather than expected future profits from a change in business model. And then the report seeks to compare these larger transactions, with what are often smaller, less publicly available transactions.
The report references a published quarterly report by BDO, where the average exit value based on private company transactions was 10.9x in Q4 2015. So, they summarise, an assumed average for IFA businesses could be 10x, with a range expected based on the quality of the underlying business.
The drawbacks of this method of valuation, they state, are:
- where profits are considered low, offers may require an uplift in profits over an earn-out period for the full value to emerge;
- acquirers may not pay wholly in cash. Share-based considerations needs clarity around when and how shares of the acquirer can be encashed.
IFAs tend to be primarily advice businesses, rather than asset managers. However, many have introduced centralised investment processes, and may even have gained discretionary permissions. This, concludes the research, means that the asset management element can be valued like a separate business.
The valuations analysed in the report found the trend of 2.1-2.4% of AUM as representative. Higher quality businesses were seen to attract premium valuations of over 3%, often where discretionary permissions were in place. One of the findings from the report, was that if businesses don’t have their clients’ money in discretionary mgmt (where there are discretionary permissions), the valuation could be lower due to more onerous/risky processes, required for rebalancing and switches.
A key conclusion of the findings is that these valuation methods are rarely used in isolation and, more often than not, metrics are blended to arrive at a robust, low-risk valuation.
Another key call out is the importance of thinking beyond the headline price. The terms and conditions of any offer are equally important and should be examined carefully as part of any assessment of an offer.
Commenting on the report, the Beaufort Group’s executive chairman, Simon Goldthorpe said:
“As Harold Macmillan observed “events, dear boy, events” are what IFAs coming up to retirement or planning to sell their businesses ought to fear most. Legislation, regulation, the state of the economy, the appetite for acquisition and consolidation all play a role in what businesses are bought and sold for. ”
Download and read the full research report here, which includes the detailed ranges of valuation by each of the metrics, and the underlying deal data used to identify these trends.