Premier Jobs UK has developed itself as one of UK's recognised brokers of buying and selling IFA companies and / or investment and pension client banks.

Acquisitions - Useful Information

There are different methods used to value IFA businesses. The different types are detailed below:

Typical valuation of '3 x trail' (i.e. buying some of the assets from a company but not the legal entity itself). Generally this will be payable in 3 stage payments: example 1 - 50% up front plus 25% in 12 months and 25% in 24 months; example 2 1/3rd, 1/3rd and 1/3rd; example 3 50% upfront and remaining 50% payable in equal monthly payments from month 7 to 18. This valuation model is often used for transactions with an Enterprise Value (EV) generally lower than £1.5m / £2m. Occasionally, we will achieve multiples above 3 times e.g. 3.5 to 4 times where there is a longer deferment period or to recognise additional goodwill where there are exceptional new business volumes.

Typical valuation of 2% of Funds under Management with 50% payable up front and second 50% payable in 2 or 3 years. IFAs should generally ignore multiples of FuM as a valuation metric, as this is far more relevant to Wealth Managers (running discretionary portfolios on a single custodian's platform). This method is also often used where the business is being acquired and the principal will stay for a period of time during the transition stage on an employed basis.

The reason behind purchasers setting out their terms split between Initial Consideration (IC) and Deferred Consideration (DC) is largely because of uncertainty whether clients will be retained. Another factor will be when some of the recurring fee income is via legacy trail and whether this income will be switched off post Sunset clause in April 2016. As a result very few deals include a totally fixed consideration. You might be quoted 3 x trail with 1/3 IC and 2/3 DC paid in tranches at the end of the first and second years, but the IC is the only element of the transaction that is fixed and therefore guaranteed. The DC is based on future performance (value of recurring income at future dates). Businesses selling their client bank will normally be expected to continue to hold run-off PI cover until at least the company is wound-up and deauthorised from the FCA.

Buying the legal entity focuses on the business as a whole and uses a suitable valuation metric as a result (EBITDA). This is a non-GAAP (generally accepted accounting principle) calculation.

The EBITDA valuation model is probably the best measure of your firm's real value. It is most closely related to operating profit. With this type of valuation model we consider the factors that impact a valuation.

Once the EBITDA figure is agreed between the seller and purchaser a multiple is applied to reflect attractiveness, regular interaction with clients, whether agreed client fee agreements are in place, market sentiment and so on.

Multiples can be as high as 4 - 8 times EBITDA for a firm that is achieving scale with strong future prospects. An initial and deferred consideration would normally be part of the buy-out contract terms.

This model allows the IFA to benefit from any increase in recurring income post completion. A fixed payout at 40% of recurring income over 15 years - equivalent to 6 x multiple of recurring income. In addition, the valuation range can be enhanced by utilising the acquiring client's asset management service leading to a fixed payout of up to 50% over 20 years - equivalent to 10 x multiple. The AAP can be paid personally or via your nominated trustees. Additionally, 30% payout rate is offered for new sales made to the client base and any increase in the recurring income value throughout the 15 / 20 year period. This same rate is payable for any introduced business. The cost of run-off PI will be met by the acquiring company.

If you are thinking of selling your business, call us to discuss the options that are available in your area. A business is worth what someone is prepared to pay for it. Pre-planning is critical to a good outcome and representation through a reputable broker such as Premier Jobs UK will help you achieve a fair price for your business whilst meeting your needs and those of your clients.