Specifically in this industry, buyers tend to be presenting offers based on multiples of an assumed Ebitda (earnings before interest, taxation, depreciation and amortisation), where the revenue and costs of the business have been adjusted to allow for any synergies and/or additional costs the new owner may incur.
For example, business owners rarely pay themselves market-aligned salaries, but will likely take pension contributions outside of an employed norm.
By using Ebitda as the underlying valuation approach, the buyer and seller can build out a future plan for growth and return on investment, and align future vendor rewards to that growth.
We have seen profit become a more and more popular approach, and it has accounted consistently for 30 per cent of the deals Gunner & Co has delivered over the past three years.
While the methods of valuation have evolved, so too have the multiples being applied. Directly after RDR, with the market almost flooded with seller opportunities and a much smaller and less diversified buyer community, business valuations were topping out at three times recurring income.
Today, for a clean business with a retiring owner, values could be 50 per cent higher than that, and more in some very specific buyer cases.
10 years on from the implementation of RDR, the M&A landscape has altered radically. For one thing, it has burgeoned. But, more importantly, the financial planning firms being bought rank higher in quality, sophistication and – crucially – value.
That is good news for sellers, who are reaching the exit doors for better reasons and largely getting a better deal on their businesses.
It is good news for buyers, who have been increasingly trammelled into simplifying the way they integrate acquisitions and are tidier organisations for it, and it is good news for clients, who are likely to find themselves on similar terms to other customers post-sale.
Most of all, it is good news for the financial planning sector, which via 10 years of frenzied M&A activity has emerged with a maturity and balance that could not have been foreseen. Not even by the authors of the RDR.
Louise Jeffreys is managing director of Gunner & Co
