How to value a Wealth Management Business
Wealth management businesses are usually valued on a “multiple” basis. This could either be a multiple of EBITDA, recurring revenue, or assets under advice. Whilst all three valuation methods are used in practice, EBITDA multiples tend to be the most common technique for valuing wealth management businesses, in particular when the firms are above a certain minimum size and the business model is purely focused on wealth management.
Valuations of Wealth Management Transactions in the UK, n=37
Source: Dyer Baade & Company (2020)
The Dyer Baade & Company corporate finance and research team analysed 37 recent and representative acquisitions in the wealth management and IFA sector, finding drastic differences in the valuation multiples. The lowest EBITDA multiple was 3x, whilst the highest was 27x. Firms in the lowest quantile were valued at 6.5x or below, whilst the top quantile started at 12.8x.
What explains the stark value differences?
It is sometimes suggested that size is a key variable in valuing a wealth management business. The data, however, shows that this is only partly the case. It is true that listed companies in this sector—which tend to be much larger than the average IFA—are valued at EBITDA multiples of 12.5x to 17.7x and therefore in the top quantile. However, our research shows that, in terms of size, five out of the seven companies with the highest transaction values are significantly smaller than the listed companies. In fact, a deep dive into the completed transactions shows that there are six additional factors that have a strong impact on the value of a wealth management business:
business model fit;
ability to eliminate risks;
achievable cost and revenue synergies;
availability of alternative sellers;
competition between buyers; and
robustness of the sales process.
1. Business model fit
The most important factor when determining the value of a potential acquisition in the wealth management sector is the business model fit between the acquirer and the acquisition target. If the value propositions (restricted vs. independent), pricing, processes, client mix and geographic footprint require little change and allow for a seamless integration, it is very likely that the buyer will be willing to pay a higher price. A good business model fit reduces post-acquisition friction for clients, advisers, and support staff, therefore increasing the potential for higher growth rates post-acquisition.
2. Ability to eliminate risks
Generally, wealth management or IFA businesses are relatively low-risk operations. Most clients and staff remain with the firm for a long time, and recurring revenue levels of 75% or more are very common. However, some firms have significant risks on the compliance side. In some cases, the potential liability resulting from claims, in particular when they are related to historic DB pension cases, can even exceed the potential purchase price. In such cases, buyers may be unwilling to accept the risk, and—depending on other factors—businesses may become practicably unsalable (see also availability of alternative sellers below). Effective risk management or mitigation is therefore essential in achieving an attractive valuation.
3. Achievable cost and revenue synergies
Some buyers will pay a higher price for an asset because they are able to recoup the premium through synergies, either on the cost or revenue side. Cost synergies are usually focused on support costs (HR, Finance, IT, Legal & Compliance, etc.) as well as office costs. Usually, revenue synergies are only achievable if the acquirer is a larger firm with an in-house discretionary fund management proposition (DFM). The revenue synergies of an in-house DFM have the potential to be much larger than any potential cost savings and can constitute a key driver in justifying a higher valuation.
4. Availability of alternative sellers
In some parts of the market, there may be a number of similar sellers who want to sell their business at the same time. In such a case, the buyer can choose between multiple options, as a result of which, may have the upper hand in any price negotiation.
This point is easily overlooked by sellers, in particular if they are smaller firms.
5. Competition between buyers
The opposite of the previous point: the degree of competition between buyers can lead to a significant variance in the valuation of a potential target. This is particularly true given that the appetite for acquisitions tends to be binary and largely driven by external factors, like progress with other transactions, financing availability and general market conditions.
The availability of alternative sellers and the presence of any potential competition between buyers are both factors that may not be evident to sellers, who will not have a complete picture of market conditions at any point in time.
6. Robustness of the sales process
Preparation, timing, and process can have a very strong impact on the value of a wealth management business. A good preparation—see also ‘Ability to eliminate risks’—is essential. In particular, owners of smaller firms tend to underestimate this topic. The two most common ‘value-destroying errors’ or misconceptions in this field are:
Overestimating the firm’s profitability: Business owners get compensated through dividends that are taxed at 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate). On a like-for-like basis, the tax rate on dividends is in most cases lower than that on salary. If the owners are shareholders only, EBITDA doesn’t need to be adjusted. However, if in addition to being shareholders the owners are also managers and advisers, their costs must in most cases be added back so as to calculate an adjusted EBITDA.
Underestimating the intensity of the due diligence process: Most sensible buyers will want to vet a business before acquiring it. In some cases, buyers submit information request lists that run to more than 400 items, and it can take months to prepare this information. Underestimating the intensity of the due diligence process can put huge pressure on existing resources and can severely affect day-to-day business.
Overestimating profits and underestimating due diligence will in most cases lead to a significant reduction in the firm’s valuation, and in some cases the buyer may even walk away. These are worst-case scenarios, but they are generally not in the public domain and happen more often than most people think. The consequences can be devastating: the seller has spent time, money, and resources on the process, and in some cases he is left—in particular if word gets out—with a damaged business.
The difference between agreeing to a valuation and getting paid the valuation
When you are selling your IFA business, you are highly unlikely to receive the agreed amount in one payment upon completion. It is common practice that part of the consideration is deferred and that the deferred payment is based on certain conditions. The way these conditions are formulated can have a significant impact on the amount that the seller actually gets paid. It is therefore possible for a buyer to agree to a high headline price to secure exclusivity, but to either then reduce the offer based on findings during the due diligence process or include terms in the Share Purchase Agreement (SPA) that do not only defer, but in fact reduce the actual payout.
In our opinion, it is therefore essential to hire a professional adviser to ensure that one receives the best possible value when buying or selling a wealth management business.
If you would like to speak to one of our experts about this topic, please don’t hesitate to get in touch:
Stuart Dyer
Mobile: +44 7881 220426
Email: stuart.dyer@dyerbaade.com
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Dr. Daniel Baade
Mobile: +44 7471 077086
Email: daniel.baade@dyerbaade.com
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About Dyer Baade & Company
Dyer Baade & Company (DBC) is an independent corporate finance boutique that specialises in Mergers & Acquisitions and related services. We are sector agnostic, but with a particular focus on Wealth Management, Independent Financial Advisers, Asset Management, FinTech, General Insurance, Trusts & Fiduciaries, Startups, and Art and Auction Houses. The firm advises Private Equity & Financial Investors, Trade Buyers & Strategic Investors, Entrepreneurs, and Business Owners. For more information, go to dyerbaade.com.