The Conundrum Update

Following my recent communication where I highlighted the current state of the market as favouring sellers, I received several pieces of feedback. These mainly pertained to my analysis suggesting the unsustainability of the present elevated prices in the long term.

Several of you enquired regarding my rationale, particularly in light of the diminishing supply of IFA businesses, which ostensibly should escalate prices as consolidators compete for acquisitions. While this logic appears sound, there are additional factors at play that are beginning to influence the prices achieved.

It’s not quite an old chestnut yet, but I would mention the importance of the Consumer Duty regulation. Its impact is becoming increasingly evident, and it is likely to affect the profitability of firms over time. Regulatory compliance incurs costs, it’s as simple as that, and it is probable that we will see more stringent requirements in the future. For acquirers, this translates into heightened due diligence during acquisition processes, and the ongoing costs of compliance.

Moreover, most Independent Financial Advisor (IFA) purchase agreements are financed, and funding providers are analysing deals more thoroughly in light of various economic considerations. I also previously mentioned that traditional business valuations based on recurring income are being superseded by more rigorous criteria like Profit Before Tax (PBT) or EBITDA. This shift is largely driven by the influence of Private Equity funding, encapsulating the adage, “He who pays the piper calls the tune.”

Acquirers and their backers are becoming increasingly detailed in their business assessments. Despite continuing to reference recurring revenues, there is a clear focus on the profits a business generates. As a result, there is a heightened emphasis on PBT in their valuation processes. I would add that if you have access to the Clearwater International Wealth Sector update issued last month, they mention that Bolt-On M&A pricing is down from its peak in 2022

In terms of strategy, even if you are not considering imminent retirement, you might still explore the option of selling your business now to capitalise on the current favourable conditions. This could also involve you continuing to work for a mutually agreed period, thus still providing you with an income as well as locking in the funds from the sale.

If any of the above resonates with you, I would recommend that you reach out to us, to discuss your specific needs and considerations. Our team is eager to assist you in planning for your future.