The market is facing unprecedented times and this has, unsurprisingly, resulted in a number of questions as to what this means for the IFA space – particularly around IFA M&A. To help add a little clarity, last week Gunner & Co. reached out to the wider market and hosted a Q&A to answer the industry’s biggest questions and offer insight from the team.
Q: Are the next 6-12 months a bad time to exit and sell?
A: At Gunner & Co., we tend to work with firms for around two years before the actual sale, so this is a key question coming up from many clients – and there is no simple answer. We often find the best place to start is the target price the vendor has. If it was realistic three months ago, we can look to see if it can be achieved now. For deals likely to complete in the next six months, buyers are certainly being innovative to remain attractive to sellers. We have seen multiples increase in individual cases in the past few weeks, and mechanisms put in place to achieve growth in deferred payments, allowing sellers to share in the upside when markets improve.
For businesses struggling with operating in lockdown, a sell at this time could be a way of enabling client continuity and security – some buyers, such as Octopus Wealth are well placed to help clients remotely:
“At Octopus Wealth we have built a cloud based business that can advise clients remotely. We can help advisers who are finding it difficult to serve their clients by providing access to our technology to support their businesses, whilst also offering innovative solutions in the longer term to become part of our family, confident their clients are receiving the highest levels of service backed by a brand they know and trust.” Andrew McMillan, Founder of Octopus Wealth.
Some buyers are also factoring in all revenue rather than just recurring income for value calculations. However if you have just started the process of finding a suitable buyer, it’s unlikely the current market position will affect you, since the process tends can often take at least 12 months.
Q: Has Covid-19 had an effect on the price buyers are paying?
A: At Gunner & Co., we have deals in two key stages – pre financial offer and post financial offer. With deals where offers have been accepted and due diligence is in progress or complete, so far, we are seeing that buyers are largely honouring the offer made and, on occasion, actually improving terms. Only one buyer has sought to revalue the business in light of a change in income and even this gives the seller the benefit of a year’s market growth opportunity to recover the valuation.
Where offers haven’t been made, many buyers are looking to be flexible to identify a middle ground which both parties can benefit from. So this could be longer payment terms to give sellers the chance to see the benefit of a recovered market while also having the chance to step away now. Or even in some cases, pre-drop valuations or increased multiples.
Gordon Kerr, Ascot Lloyd’s acquisition director commented on this to us: “We’ve quickly adapted as an organisation to new ways of remote working, and proceeding with business as usual. We have honoured acquisitions which were agreed pre Covid-19, and remain active in the market for new opportunities. We are looking at various mechanisms to help both buyer and seller, including flexible payment terms to allow for market recovery”.
Many buyers want to buy and their motivations are fairly long term, so they would rather find a way to continue working on acquisitions now, in a way that works for sellers too.
Q: What is the current ‘state of play’ with potential buyers? Are they pulling back completely, changing their prices or ploughing on as normal?
A: I’m seeing varied reactions from our buyers – indeed two large players came out in the press last week with polar opposite stances.
IWP for instance are very much moving forward with acquisitions, with David Inglesfield, CEO telling me: “While the circumstances around COVID-19 and, its impact on the markets, are unprecedented, I don’t believe the current environment will meaningfully alter trends around IFAs looking for investment opportunities. If anything, it amplifies the need for investment in technology that allows for digital client communication. Clients will want to be able to check their portfolio and assets remotely at any time. We expect to continue to see local IFAs looking to join larger groups who can provide them with better operational capabilities.
“Our current acquisition pipeline remains strong, although some terms may need to be slightly adjusted to meet current market realities. We see the overall direction of the market staying the same.”
Many clients we are working with are ‘ploughing on’, although not necessarily as ‘normal’ – see the answer above on pricing and how buyers are innovating to secure deals.
We know a few of the large buyers are pulling back, but generally this has meant deferral rather than withdrawal. Where time, cost and effort has been spent in reaching agreement, our experience so far is that buyers would be reluctant to abandon a project entirely. The response has been to either defer the acquisition or offer more favourable commercial terms. Decisions on what to do appear to be dictated by the acquirers long term strategy and how they are able to access funding. Buyers that have secured mutual agreement on a deal will likely prefer to defer rather than abandon a deal completely.
Q: How are deals ‘in play’ being affected for IFA M&A? For instance, if you are selling and have appointed lawyers and have started due diligience?
A: There will likely be somewhere between 100-150 deals started before lockdown was enforced. There are three key impacts in our view: the commercial viability of the deal; the ability to complete DD and legals, and finally, the client communications.
Whilst previous answers look at buyers’ commercial stance, in terms of completing DD and the legal work, with good technology, both of these elements can be completed with little to no physical interaction.
Client communications can be a little more tricky. Deciding if this is the right time to share something like this with clients will depend on a couple of factors, for example, will the adviser be employed by the buying firm? Business owners should know how comfortable (or not) their clients are with their current financial situation and whether they would see a sale at this point as unsettling.
That said, almost all transactions take place where the buyer is bigger than the seller and some firms are taking the view that the buyer could potentially offer clients more resources, more access to information and potentially more security.
Q: Are lawyers increasing their fees or changing the way they charge given the current turmoil?
A: We asked a couple of solicitors to help answer this one:
Alex Canham of Herrington Carmichael: Despite the current turmoil I would not say that we’re seeing a shift in charging structures. We continue to offer a mix of fixed and capped fees, so if you have a clear deal structure, a fixed fee option should still be available. As for the level of fees, as a rule, I would not expect to see these increase. Fixed fees are usually determined by anticipating the level of work involved on the deal. So whilst some clients may need additional support, if the original deal stays the course then the fees should be as anticipated at the outset.
Andrew Bretherton of Freeths: A lot of our legal M&A work is charged at fixed fees based on a pre-agreed scope of work and time frame and we will not be increasing our fees in the current difficult circumstances. We are fully set up to work remotely and continue to complete deals for our clients. We expect there to be a significant drop off in M&A work for the next few weeks/months but believe that the IFA sector will bounce back strongly when things get back to normal.
We are in uncharted waters, both historically and economically, and with that comes uncertainty and challenges for the IFA space. But we are on standby at Gunner & Co. to do all we can to help alleviate any fears and offer our views.