Around three-quarters (72%) of IFAs believe they are undervalued by potential acquirers, according to a recent survey by HSP Consulting.
The research, which surveyed 100 advisers, found that firms often question the fairness of buyers acquiring their business and perceive an “inherent unfairness” in the current valuation process and disproportional risk adopted by buyers.
This perception of undervaluation could hinder the sale of many IFA businesses, HSP Consulting said.
“Retiring IFAs must be proactive in seeking better opportunities that align with the true worth of their businesses. Settling for less than what their business deserves is not the solution.”
Traditionally, the industry standard for stage payments has been an initial 50%, followed by residual payments spread over 24 months.
However, the survey results indicated that a growing number of IFAs view 75% as a more appropriate figure.
Selling IFAs have long felt that they disproportionately shoulder the risk in the sale process.
Around 16% of IFAs expressed interest in securing an additional bonus in the form of a shareholding in the acquiring company.
HSP Consulting said: “This alternative compensation structure could lead to more significant rewards in the future, especially if the acquirers enter the market or undergoes an IPO.
“Embracing this option could be a game-changer for IFAs seeking to enhance their financial prospects.”
Challenges
Elsewhere, the survey found that almost half (40%) of IFAs face uncertainty when valuing their businesses beyond traditional multiples or Ebitda.
It also found that consolidator-based businesses face mounting pressure to grow and expand in a shrinking pool of IFA firms.
It underscores the opportunities for growth by considering an adjusted approach of 3.3 to 4.5 times the multiple (dependent on the individual opportunity), with 75% paid upfront and the residual after 12 months, plus shareholding in the acquiring firm where appropriate.
If IFAs intend to stay on board for several years after the sale, the formula will look different.
“Now is the time for IFAs to take charge of their futures,” HSP Consulting added.
“For IFA buyers, embracing innovation and exploring alternative options is key to attracting desirable businesses in this competitive market.
“For IFA sellers, professional advice can be a game-changer in securing the best offers and navigating the intricacies of valuation. Act now to unlock hidden opportunities.”
By Brian Spence -HSP Consulting Founder
