Over the past five years there has been significant consolidation within the IFA sector. Hardly a day has passed without another deal being announced involving firms across the spectrum.
Based on data from merger-and-acquisition advisers, funds spent on larger M&As in the IFA market jumped by more than 100 per cent in 2019 to £249m, up from £118m the previous year. The pace of consolidation among smaller firms has been even greater due to a combination of factors: retirement, regulatory costs and the level of valuations being paid.
Covid-19 has changed all that, at least for the moment. A number of buyers have paused their activities, some deals have been mothballed, and many would-be sellers have been spooked by the uncertainty of valuations.
Yet some sellers and buyers are pressing on, so why is there an apparent divergence of approach?
If the fallback in markets is not reversed, inevitably valuations will be affected. If recurring income/profitability falls by, say, 25 per cent, this will carry through to what is paid by buyers.
Some buyers still in the market where deals are close to completion have agreed to use valuations at, for example, 31 January 2020, but they will be able to adjust the deferred payments typically between 12 and 36 months so, unless there is a recovery in markets, sellers will receive less. In short, the ultimate risk still rests with the seller.
2. Timing of sales
For a few, a sale may be necessary due to ill health or other pressing reasons, but for most sellers there is a choice: wait or proceed now.
Given some buyers have paused their activities, sellers will not be able to choose from the same number of buyers, and that in itself may be reason enough for them to decide to hold off until the market returns to normal – whenever that may be.
However, where a buyer meets a seller’s selection criteria (those criteria must be very clear) and there is an agreed valuation methodology that the seller finds acceptable or sufficiently flexible (see below), it may be appropriate to proceed.
In all cases, now more than ever, would-be sellers need to stand back and take advice before they proceed because the decision has arguably become more complex.
3. Changing deal structures and building in flexibility
Some buyers are already adapting their deal structures to meet the needs of sellers.
For example, one option would allow firms to sell for full value, as if the market falls had not taken place. While the payment in any deferred consideration is at risk, the same option provides an averaging mechanism so, provided the markets recover some time in the next three years, sellers will receive full value.
The other ‘tweak’ is to extend the deferred period, but then the period of uncertainty and risk for the seller is extended too.
For those who have already sold their firms in the past two to three years, and where the deferred period has yet to be completed, the sale and purchase agreement may provide flexibility on the date when deferred payments are calculated and paid. Typically, these are termed ‘market valuation adjustment’ clauses and provide for the deferred payments to be delayed for between three and 24 months, with 12 months being the most common.
4. Understanding the detail and legal implications
Most SPAs run to more than 30 pages and some acquirers’ versions are nearer to 100 pages.
Now more than ever, it’s important for sellers to read and understand the document, and all the permutations, and not just rely on others. Once the deal is completed there is no going back, so the possible outcomes should be modelled and carefully considered as the recent market falls have amply demonstrated.
5. Take advice
Few sellers take no advice whatsoever, but some take very little, confining the external input to the SPA. Even then, they may not use a specialist lawyer.
It’s fundamentally important to engage a lawyer who understands and has experience of deals in this sector of the market; to obtain tax advice where required; and to have access to specialists who know the market, what’s on offer, and what represents ‘good’.
The sale of an IFA/financial planning business is the largest financial transaction most owners will ever be involved in. It therefore pays to spend the requisite amount of time and effort on getting the best terms available, understanding the possible pitfalls and risks, and accessing the right level of expertise.
The Covid-19 pandemic has brought this point home in a dramatic way.
This article was originally published on Money Marketing