Advice firms are now consistently being sold for more than four times recurring income, according to M&A consultancy firm Gunner & Co.
This is up from an average of 3.4 times recurring income in 2021, the firm’s deal tracker said.
At the same time, Gunner & Co surveyed owners of UK financial planning firms and found 60% are looking to exit the industry in the next three years.
Unsurprisingly, 61% of respondents cited retirement as the key driver for approaching a sale, however, business sales several years before retirement are becoming more popular, as 38% said they are motivated by future proofing their strategic plan – growing from 34% in 2021.
This is either as a form of longer-term succession planning leading to retirement (14%), realising capital to de-risk (17%) and to a lesser extent selling all or part of the business to open the door to internal investment and future growth.
Deal types
An outright external sale is the favoured route for business owners, with 70% preferring this over a management buyout (11%).
When questioned on the type of buyer business owners would consider selling to, the majority preferred smaller scale buyers, with 63% stating they would consider regional buyers and 37% a small local option (down from 55% in 2021) versus 51% considering a consolidator (up from 43%), and 30% a consolidator start-up.
Only 15% of respondents suggested they would sell to a restricted buyer.
Price was overwhelmingly stated as the most important factor (62%) followed by an alignment of client proposition (48%). The least important component with only 2%, was client charging structures.
Shift
Louise Jeffreys, managing director of Gunner & Co, said: “With new entrant buyers offering partial equity purchases, growth funding and more autonomy for the selling business – the M&A market is moving away from the dominance of consolidators we saw a few years back.
“With the growth in new entrant buyers and start-ups, we may not see a significant decrease in the number of firms for some years to come. That said, I would suspect looking over a five-year plus horizon, it is likely a smaller number of larger firms will dominate, as smaller businesses are either squeezed out due to operational pressures or exit for retirement reasons and mid-size acquirers merge to reach scale.
“Mergers, management buyouts and management buy-ins are notoriously hard to execute, despite often being an aspirational preference for business owners. Whilst they can afford the business a level of continuity a consolidator-style buyer can’t they are fraught with challenges around identifying the right successors, agreeing the value and fund raising.
“The challenge with smaller-scale buyers is their experience in completing deals and their ability to pay – these factors should not be overlooked. Given the trend that multiples have consistently risen over the last three years, business sellers are more and more satisfied with offers in the market, further fuelling motivations to sell.”
