Providers, networks, bigger IFA firms and smaller high street outfits are engaged in a whirlwind of ...
Providers, networks, bigger IFA firms and smaller high street outfits are engaged in a whirlwind of acquisitions, bid speculation and jostling ahead of regulatory changes that the FSA says it will implement to bring about depolarisation.
However, the central question for every potential buyer or seller of IFA businesses remains the same: just how much is an IFA worth?
Deals are often shrouded in secrecy because most IFA firms are privately held, but the actions of publicly-listed firms give some insight into valuations.
In the past week acquisitions were announced by Berkely Berry Birch and Inter-Alliance, but they came with significantly different valuations.
BBB bought Professional Financial Solutions for £1.53m in cash and shares. This gave it 17 IFAs working in Huddersfield and Camberly. Roughly dividing that sum by the number of IFAs - a calculation that excludes the value of any administration or other staff and any infrastructure, etc. - means each one was valued at just more than £88,000.
Inter-Alliance bought Heartland Independent Advisers for £2.5m, consisting of £0.75m in cash up front plus additional milestone payments. The main caveate is that at least 25 advisers must sign up with IAL, bringing commission of at least £60,000 each. Assuming the 25 do stay, the full price values each IFA at £100,000 - again, according to the same rough calculation applied to the BBB deal.
The difference in valuations of IFAs between the BBB and IAL deals is 12%.
That might not seem like much given the different sizes of the businesses being taken over, levels of profitability, etc. However, it should not be forgotten that deals struck now are done in the midst of a savage stock market downturn.
About two years ago, in November 2001, Germany's biggest IFA group AWD bought Thompson's, the UK's 10th biggest IFA at the time.
The deal was valued at €51m (£32m) in cash, for which AWD got 140 advisers, according to information released at the time, which would value each IFA at more than £228,000.
That is a clear premium of more than 100% compared to either the BBB or IAL deals.
Since that deal ADW's share price has dropped from €33 to €10, despite boasting of a €500m cash pile available for deals following the purchase of Thompson's.
During the same time BBB's share price has dropped from about 118p to 40p, while IAL's has dropped from 90p to 70p - albeit with a rise to 122.5p in between.
One inference is that with market valuations of listed IFAs themselves being dumped by the market, it makes no sense for these same firm's to pay over the odds for IFAs who are in any case feeling the squeeze from changes to the regulatory regime.
For the larger product providers a scrapping of the 10% ownership limit - the result of the Better-than-Best rule according to proposals to scrap the rule contained in CP166 - would not pose a problem.
A Royal Bank of Scotland or Bradford & Bindley, which already operates as an IFA through its "The Marketplace" offering, would be able to swallow Inter-Alliance's £67m market capitalisation value without blinking.
Lighthouse is worth a shade less than £8m, Berkely Berry Birch is worth £35m, and Millfield Group is worth £62m.
Misys' £1bn market value would present more of a problem, but then that is the value of the whole group.
It acquired the troubled former DBS Management for £75m in cash in August 2001, but given the problems facing the unit, Misys might eventually consider any price.
The differing values offered for IFAs and IFA firms coupled with ongoing stock market losses makes it difficult to determine a set market value for IFAs.
Some might say that a good guide would be the amount of commission earned, as this would indicate the market value of a particular IFA's abilities.
However, this does not take account of differing values in client bases, regional location, and many other factors, not least the value of possible future business remaining with a firm, even if an IFA decides to relocate.
A strong stock market recovery could result in better ability for listed companies to either raise new capital or spend capital already raised for acquiring IFAs and/or their businesses, without getting into trouble with already peeved shareholders.
The problem is that that could take time, and meanwhile the costs of compliance are set to rise and business models will be strenuously tested by the depolarisation regime.
EIS and Seed EIS sectors
'Truly making a difference'
Avoidance, evasion and non-compliance
From 6 April 2019