Savvy IFAs looking to offload their businesses in the New Year are building up their profits to entice buyers rather than relying on selling on a recurring trail basis, according to a consultancy that deals in adviser merger and acquisitions.
Harrison Spence director Brian Spence said there is uncertainty about the value of adviser businesses at present.
Firms can still get about three times recurring income if they have a model of 0.5% trail, he said.
However, new model firms that work on the basis of receiving 1% trail are only being offered about 2.2 times recurring income as the uplift has already been priced in with their higher charge, he said.
"If you are buying a business, you want to be able to increase margins. With firms on 1% trail that is already priced in so you see a situation where better companies are actually going for less."
Advisers' way around that is to build up profits, said Spence, which will enable them to be valued on an EBITDA basis - earnings before interest, taxes, depreciation and amortization.
"The smarter guys are moving away from using their firms as a ‘lifestyle business' and taking all the money out, to becoming more corporate, building up profit.
"That way they can be valued on an EBITDA basis where they can then earn between four and a half times to eight times EBITDA when they come to sell."
Another option Harrison Spence offers advisers looking to sell their business in the next three to five years is to forge a relationship with a wealth manager.
Under the terms of the relationship, the IFA agrees a future sale date, and then becomes restricted and uses the wealth manager's investment model until the sale is completed.
Spence said one of the advantages of this route is that the wealth manager will often agree to lend the adviser firm money to grow the business pre-sale.
"This is especially good if the adviser is selling based on a percentage of funds under management," said Spence.
He recommends that IFAs thinking of selling their business should get advice first.
"Fear leads a lot of people to make mistakes when they come to sell. They often just think about getting out as quickly as possible.
"But there are other options open to them. They can stay on as ambassadors for the firm, or continue as advisers and carry on earning."
Thinking of selling up? Read The essential ingredients to a successful sale.
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