To maximise these opportunities, private equity houses have backed fledgling buyers with a new strategy, often termed ‘buy and build’.
The strategy involves acquiring one or more ‘hub’ businesses to use as springboards for future acquisitions.
So while the latter stage of the strategy brings us back to consolidation, the entry point has given a significant number of financial planning firms the chance to sell their business without significant cultural and operational changes.
And many of these deals are leaving those business principals with ‘skin in the game’ – equity either in their existing operation or the group as a whole, to ensure they are rewarded for the next growth chapter of their firm.
This in turn has led to the size of deals being done in the market to swell – we have seen the average deal values on Gunner & Co’s projects increase threefold since 2017.
As the complexity and size of the deals increased, so too has the shift towards buying the whole share capital of a business, rather than simply the underlying assets of the client book.
While the second stage of this strategy aligns to more conventional deal approaches, the buyers are smaller regional firms, giving retirees the chance to sell to more culturally sympathetic buyers, but taking away the risks of financial backing and acquisition capability.
This expansion of the buyer market has naturally led to more competition for quality firms for sale, but more importantly has opened up a myriad of options for business sellers, allowing them to plan their succession and put their plans into play at a time that best suits them.
Valuations
All of these changes in the M&A marketplace have had a profound impact on both how businesses are valued and how much a buyer is prepared to pay.
Looking back a decade, purchases were generally fairly simple – client asset purchases were frequently preferred over share sales, in part due to the buyers being less open to taking on historic advice liabilities and in part due to the relatively small size of the deal.
Early on, there were also tax benefits to this approach. This led to practically all owner-operator sales being valued on recurring income.
That approach remained very much the norm for six or seven years, and became widely adopted across the buying community and understood among the seller market.
With the advent of ‘buy and build’ strategies from around 2018, in which the buyer is backing a firm to grow in the future, the valuation approach aligns with the wider M&A community, where profit is the underlying metric of value.
