The valuation of independent financial advice businesses has dropped from an average of 4 times recurring income in 2022 to 3.3 times recurring income for the first quarter of 2024, according to a new study.
Valuations were an average of 3.5 times recurring income in 2023, suggesting a realignment towards a lower but more stable level, according to a new report from IFA M&A specialist Gunner & Co.
The firm has also seen a drop in profit valuations, based on adjusted EBITDA, from a peak of 8 times in 2022, to 6.7 times for the first quarter in 2024.
Louise Jeffreys, managing director at Gunner & Co, said: “Valuations spiked during the COVID years, where globally M&A boomed. More recent market turbulence and inflation have essentially reset trends. We expect to see business sale values stabilise at levels closer to the years preceding 2020, in the 3.2-3.7X recurring income range.”
Recurring income has continued to be the predominant method of valuation, consistently accounting for 65-75% of the valuation approach, although profit was the favoured approach for larger more complex firms.
The analysis also showed that there has been a consistent shift away from asset purchases toward share purchases within the financial advice M&A landscape since 2017. In 2017, asset purchases comprised over 55% of the transactions, but in the first quarter of 2024 all offers were positioned as share purchase.
Gunner & Co said this shift may in reaction to the most recent FCA direction set out in its CP23/24, with buyers taking the position that an asset purchase is less likely to shield them from future liabilities than it may have historically.
In November the FCA published proposals to compel investment advisers to set aside funds in advance to compensate investors if bad advice is given.
The FCA said its proposals would require about 5,000 ‘personal investment firms’ – investment advisers – to set aside capital so that they can cover compensation costs in the event of claims.
The FCA says this will ensure the “polluter pays” when consumers are harmed.
The regulator said the additional capital requirements falling on firms would be “proportionate.”
The proposals would require investment advisers (referred to as personal investment firms by the FCA) to calculate their potential redress liabilities at an early stage and then set aside enough money to meet theses liabilities and report potential redress liabilities to the FCA.
