The IFA Conundrum

The Situation
Let’s say for example that your Independent Financial Advisory firm generates an annual recurring revenue of £750,000, with an ongoing investment advice fee of 0.5% and a high level of profit before tax. While you may be not considering retirement at this moment, it is important to note the prevailing market conditions.

Market Opportunity:
Presently, the market is definitely a sellers’ market, offering the potential to sell your business at an exceptionally high multiple recurring income, and possibly more depending on what you have to offer.
In the above example, this could translate to an estimated value of anywhere in the region of £3 to £4 million should you decide to sell now.

The demand for financial advisory services from clients is stable, with a relatively low attrition rate among those no longer requiring ongoing guidance. Nevertheless, it is evident that a pressing issue exists within the industry, as the financial advisory sector grapples with a burgeoning scarcity of professionals due to an increasing retirement rate. New entrants to the market are limited due to various impediments including increased regulation.

With increasing frequency, smaller advisory firms are being integrated into larger organisations seeking to enhance their skill sets and capitalise on economies of scale.

There currently are numerous firms that will be interested in buying your business.

Future Valuation Concerns:
However, it’s crucial to understand that the historic valuation of your business, based on recurring income, has been replaced by a far more exacting multiple of Profit before Tax or EBITDA.
This shift in valuation metrics from a recurring revenue multiple to a profit-based formula, is being driven by the use of Private Equity funding by the majority of acquirers. Small firms have traditionally been valued on recurring revenue multiples, but purchasers are increasingly meticulous in their assessment of businesses. They might still talk about the recurring revenues as their metrics, however, they are definitely looking at the profits the business produces.

Consequently, buyers are paying greater attention to EBIT (Earnings Before Interest and Taxes) in their evaluations. Further, as I highlighted in my last email, there are potential changes in tax allowances in the offing which may have a significant impact on the amount of tax you will have to pay following a sale.

Expert Perspective:
Our analysis indicates that the current elevated valuations are not sustainable in the long term. Nevertheless, there exists a timely opportunity to capitalise on the current market conditions, securing the best possible price for your business now, with the possibility that you could continue to work if you so wish to do so.

Professional Advisory Services:
As independent consultants specialising in the retail financial services sector, we possess the expertise to assist IFAs in evaluating their growth strategies and exit plans.

Confidential Consultation:
We invite you to discuss your specific situation confidentially with us to explore the most advantageous path for your business. Please feel free to contact us for a detailed conversation.