Advisers shouldn’t get too carried away and over-value their firm, warns David Hesketh, group M&A manager at Perspective Financial Group Ltd
Value is often a very personal thing – how one individual values something can be very different to how someone else values that same item. I, for example, have no idea why my wife thinks a handbag can be good value at several hundred (or thousand) pounds and yet she believes that my ticket at Old Trafford on a Saturday afternoon is a waste of money and of no value.
Establishing ‘value’ can be a difficult job but is one of real importance to IFAs for a number of reasons. Not only has RDR and the move away from commission (where product providers determined the ‘value’ of the IFAs work) led advisers to think about the value they add to clients and the subsequent financial value and fee of their advice, but in my work I also see many IFAs looking to place a value on their business as a whole.
Working in this role I meet many owner-managers who find themselves in a position where they have taken a firm through its natural life and are now looking to realise capital from the business, reduce the management hassles of running a practice, retire or looking for the next step in the evolution of their business. The onset of the new RDR environment may have brought forward their decision yet the fact is they were getting to a point where some sort of decision had to be made anyway.
Most advisory practice owners have put a considerable amount of their lives into establishing, forging and making their firm a success. Of course, they are going to want to protect it, those who work there and the interests of their clients – that will be a source of personal pride and it is something to be applauded.
The point is, now they have reached that point, what do they do and, more importantly, what value do they place on what they hold in their hands? This is where the point about value becomes important as there is certainly a common theme I see – that is for owners to completely overvalue their business when starting out on any negotiation with a potential acquirer.
I have seen it countless times and now expect it with most potential firms I meet with. The reason of course is that the business is extremely personal to the owner and they overvalue its worth because of this – a bit like my wife with her handbags. At this point reflection is often required and we will start to get a sense for whether any type of deal might be achievable.
The other point to make with valuations is that gossip, rumour and conjecture can all cloud an individual’s thinking when it comes to selling a firm. You can guarantee that an owner who may have heard about several acquisitions will always believe that their firm is worth as much as the firm that has been sold for the most. Plus, with a number of high-profile acquisition vehicles operating in the marketplace, there can be a tendency to gain headlines by suggesting most firms can achieve a valuation based on ‘enhanced multiples.’
This is another area where I would urge owners to be healthily sceptical certainly they should take a good look at when any potential acquirer is likely to pay and how much control the vendor has over the final valuation.
Nowadays, a number of acquirers are basing their valuation not just, for example, on multiples of recurring income but also on the leveraging of any end flotation. This ‘end game’ may not be achieved by the larger group for several years and there may be little guarantee of the final valuation being determined solely by the good performance of the vendor. Practice owners may find they prefer to work on a rather more secure basis of cash up front and a deferred buyout exit strategy which is set in stone and determined by the vendor’s own performance and meeting of targets. Again, it comes down to the value one places on money in the hand now and at structured set times in the future or an enhanced value at some point over the next (however many) years which may have fewer guarantees.
All in all, I urge owners to be rightly proud of their businesses and to what they have achieved personally in taking them to a point where they may be acquired. However, the point is not to get too carried away and to over-value the firm potentially placing their ambitions out of reach because they are not prepared to be realistic. As anyone knows, the business will only ultimately be worth what someone is willing to pay for it and therefore it pays to maintain a sense of realism in order to secure an outcome that is right for everyone concerned.