Succession planning in the advice profession

Posted on Sunday, May 8, 2022 by Lewis Greene4 comments

Gunner & Co., the UK’s leading M&A brokerage and consultancy business has found that 60% of financial planning firm owners they surveyed are looking to exit the industry in the next 3 years. This was just one of the highlights from their annual survey exploring succession planning in the advice profession.

This comes at a time where business valuations have jumped considerably, with businesses regularly selling for more than 4X recurring income, up from an average of 3.4X in 2021, according to Gunner & Co.’s deal tracker data.

Activity has been steadily growing in the space, with a diversification of the buying market leading to increased deal values and opening the market for a broader range of buyers, which in turn increases momentum for sellers to join the M&A market.

Not surprisingly, 61% of respondents cited retirement as the key driver for approaching a sale, however business sales a number of years before retirement are becoming more popular with 38% of respondents stating they are motivated by future proofing their strategic plan – growing from 34% in 2021, either as a form of longer-term succession planning leading to retirement (14%), realising capital to de-risk (17%) and to a lesser extent selling all or part of the business to open the door to internal investment and future growth.

“With new entrant buyers offering partial equity purchases, growth funding and more autonomy for the selling business –  the M&A market is moving away from the dominance of consolidators we saw a few years back.”  Commented Louise Jeffreys, managing director of Gunner & Co.

Succession planning forms a significant part of strategic planning, according to 76% of respondents which suggests many firms in the sector are approaching the tail end of their natural life cycle.  Encouragingly, according to Gunner & Co.’s analysis, the total volume of companies only decreased by 0.9% from 2016 to 2021, so whilst exit planning is prevalent, that is not always resulting in a net decrease in firms, avoiding a service gap.

An outright external sale is the favoured route planned for business owners responding to the survey, with 70% preferring this over a management buyout (11%).

“With the growth in new entrant buyers and start ups, we may not see a significant decrease in the number of firms for some years to come.  That said, I would suspect looking over a 5+ year horizon, it is likely a smaller number of larger firms will dominate, as smaller businesses are either squeezed out due to operational pressures or exit for retirement reasons and mid-size acquirers merge to reach scale.

“Mergers, management buyouts and management buy-ins are notoriously hard to execute, despite often being an aspirational preference for business owners.  Whilst they can afford the business a level of continuity a consolidator-style buyer can’t they are fraught with challenges around identifying the right successor(s), agreeing the value and fund raising.” Added Louise.

When questioned on the type of buyer business owners would consider selling to, the majority preferred smaller scale buyers, with 63% stating they would consider regional buyers and 37% a small local option (down from 55% in 2021) amongst others, versus 51% open to considering a consolidator (up from 43%), and 30% a consolidator start up.

“The challenge with smaller-scale buyers is their experience in completing deals and their ability to pay – these factors should not be overlooked” counselled Louise.

Where a firm is independent, that status was overwhelmingly preferred in a buyer – with only 15% of respondents suggesting they would sell to a restricted buyer.

Putting independence aside, when asked which two factors were the most important when assessing a potential deal, price was overwhelmingly stated as the most important factor (62% of respondents) followed by an alignment of client proposition (48%). Least important, with only 2% choosing it as one of 2 factors, was client charging structures.

“Given the trend that multiples have consistently risen over the last 3 years, business sellers are more and more satisfied with offers in the market, further fuelling motivations to sell” concluded Louise.


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