It’s widely accepted that the RDR was the catalyst to what has been a boom of consolidation in the financial planning sector over the last decade, with an estimated transfer of assets reaching £55bn and culminating most recently in a number of large-scale acquirers selling on to providers.
So much has changed during the decade since, and many of those changes have snowballed in the last five years, from deal structuring, to how business are valued and the multiples used, not to mention a significant evolution in the make-up of the buyer market.
Who is buying, what they’re looking for and how they will value a business has all changed significantly.
Buyer market diversification
The buyer market has undergone many changes since the RDR was introduced. During that period where adviser and company numbers plummeted, there were a handful of national firms well-positioned to acquire those firms. Consolidation and integration were really the only way possible at that point, when the continuity and relationship with the selling adviser was often lost.
The buyer market has evolved considerably from those days. While consolidation and integration remain a key outcome of many business sales, particularly where the vendor is retiring, continuity (or improvement) of client service, charging and outcomes has become at the heart of all deals.
Furthermore, numerous private equity (PE) houses have become interested in the M&A opportunity in the financial planning sector over the last 5 years, creating a new breed of business buyer. Attracted to an industry built post-RDR on low-risk, recurring income streams, a fragmented owner-operator market structure and what has been a bull market, it’s a surprise that PE didn’t become more involved earlier.
To maximise these opportunities, the PE houses have backed fledgling buyers with a new strategy, which is often coined ‘buy and build’. The strategy involves acquiring one or more ‘hub’ businesses to use as springboards for future acquisitions. Many of these deals are leaving those business principals with ‘skin in the game’ – equity either in their existing operation of the group as a whole, to ensure they are rewarded for next growth chapter of their firm. This in turn has led to the size of the deals being done in the market to grow considerably – we’ve seen the average deal values on Gunner & Co’s projects increase three-fold in the last 5 years.
This expansion of the buyer market has also led to more competition for quality firms for sale, but more importantly I believe, has opened up a myriad of options for a business seller, to allow them to plan their succession and action that plan at a time that best suits them.
Buyers are competing strongly over businesses, with large, multi-adviser firms being the most sought-after.
These changes in the M&A marketplace and the increased competition, alongside a reduction in firms available to buy, have had a significant impact on both how businesses are valued and how much a buyer is prepared to pay.
As recently as 2015, purchases were fairly simple – often client asset purchases were preferred over purchasing share capital due to the buyers being able to offset these purchases against tax, and often being less open to taking on historic advice liabilities. This led to practically 100% of the owner-operator sales being valued on recurring income.
When ‘buy and build’ strategies started too surface from c. 2018 where the buyer is backing a firm to grow in the future, the valuation approach aligns with the wider M&A community, where profit (EBITDA) is the underlying metric of value.
By using EBITDA for valuation, the buyer and seller can build out a future plan for growth and return on investment and align future vendor rewards to that growth.
We’ve seen profit become more and more popular approach, and it has accounted consistently for 30% of the deals Gunner & Co has delivered over the last three years.
As the methods of valuation have evolved, so too have the multiples being applied. Directly after RDR, with the market almost flooded with seller opportunities and a much smaller and less diversified buyer community, business valuations rarely exceeded 3X recurring income. Today, for a clean business with high-net-worth clients, values could be 50% higher than that, and in some very specific buyer cases even greater.
The decade since RDR has seen the buyer market, and the financial planning firms being bought, grow in quality, sophistication and overall value. The last five years have accelerated consolidation as different succession planning options have emerged from the buying market.
It hasn’t been without its challenges. My vendors remain wary of selling all of their business and only receiving a portion of the value up front. Compliance hurdles have scuppered many deals, particularly where Defined Benefit pension transfer advice was involved, and now increases in inflation and interest rates threaten to impact both valuation multiples and outstanding payments due.
But all in all, the increase in quality of firms, coupled with increased competition in the market has benefitted clients and sellers alike, with a much more competitive M&A market being held accountable to the commitments they make to vendors.