Advice firms acquired by Fairstone net average 111% earn-out price

The consolidator and Chartered financial planning operation said its downstream buy out (DBO) programme resulted in all its acquisitions either meeting or exceeding their target sale values.

It added publishing full earn-out data was a first for the industry. An earn-out is where all or part of a purchase price is linked to the future financial performance of a target firm.

Fairstone-acquired practices received an average 111% through the earn-out process, it said. With a sixth netting more than 135%. It said none of the firms that completed its two-year DBO programme got less than 100%.

Some 39% of firms received more than 5% in excess of their sales value; 22% got 20% above the original purchase price and 17% more than 35% higher than their full sale price.

It said the average excess sale proceeds across all acquisitions and all earn-out stages was 11%.

The business said 45 firms had been incorporated through the DBO programme since 2011. Its tenth of 2020, which completed this week, was Hampshire-based adviser Cube Financial Planning.

Fairstone, headquartered in Newcastle, said it had made total excess consideration payments of £5.4m to date.

Source: Fairstone

Chief executive Lee Hartley said securing full earn-out potential was a "differentiator" in the sector.

He said: "Some large consolidators are delivering earn-out payments that result in an average of between 80% and 90% of the original headline price negotiated for those acquisitions. Crucially this implies that some companies are getting even less than that.

"At Fairstone, the firms that we have acquired on average receive 111% of their total earn-out value, with some receiving as much as 139% of their expected consideration. Very importantly, none receive less than 100% of their original sale price.

"These figures really set us apart from our peers. We describe ourselves as an acquirer of sustainable growth, not simply a consolidator, and these figures underpin our position as a proven, secure buyer of quality businesses."

Fairstone's DBO model typically consists of a two-year integration period where it works with advice businesses on integration prior to final acquisition. All advisers and staff are then retained within the businesses with no client service disruption.

Hartley added: "Dealing with integration post-transaction can often lead to significant friction, placing undue burden on both parties and critically creating business disruption during the key early phase of an earn-out.

"Integration isn't always easy and can involve a lot of change - that is why we deal with this process gradually over a two to three year period ahead of the sale and help our partner firms to grow profits in the intervening period. This approach also helps to reduce integration risk and at the same time relieve pressure on selling shareholders.

"Importantly, our earn-out structures are based on maintaining a sustainable level of financial performance and nothing else, which means that anyone looking to sell their business is in full control of their earn-out. We simply measure revenue and underlying profitability to validate the earn-out, there are no onerous obligations that sit outside of the sellers' control or which compromise clients in any way."

Hartley said the firm's strategy was borne out in the data. "Our partner firms are delivering more revenue and growth than either their own forecasts or our buy-out agreements are based upon. In very simple terms, we are buying great businesses and then sharing the upside."

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Leigh Johnson is former principal of Lincolnshire-based Zimb Johnson Bespoke Financial Planning, which was acquired by Fairstone in 2018.

He said: "There were several reasons I decided to partner with Fairstone. Clearly, I felt it essential that the company to whom I sold my business, conducted themselves with integrity, honesty and in a clear and straightforward manner.

"This was vital to ensure that my clients long term interests would be assured. Equally, as the seller of my business, I was keen to ensure that the sale proceeds I expected to receive, were actually likely to be paid. I was entirely satisfied on both counts. 

"I was very pleased indeed to have been able to increase our profitability year on year because it represented a measure of very favourable client response and satisfaction. We received 100% of our sale value, with no fuss and no quibble and there was never any doubt throughout the process that this would happen."

Fairstone has more than 69,000 clients and operates nationally across 42 locations. The business has 380 regulated advisers and 275 operational staff.

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